Gold crashes on US rate rise jitters

Heavy buying by European investors in ETFs but weak Asian demand could keep prices weak, say analysts

Following rising prospects of a rate increase by the US Federal Reserve in June or by July, global gold prices have dropped to a seven-week low; robust US economic data also make a stronger case for a near-term rate rise.

At the spot market here, gold has fallen to a three-week low. Standard gold was down Rs 560 or 1.9 per cent on Wednesday to Rs 29,010 per 10g. Gold has fallen from a high of Rs 30,310 per 10g in three weeks or 4.2 per cent. Silver closed on Wednesday at Rs 39,420 a kg, down 6.8 per cent since the May 2 high. Spot gold was down at $1,224.40 an ounce in the first half in London trade. Silver is $16.31 an ounce.

The dollar hit a two-month high against a basket of currencies on Wednesday, though it gave up gains against the euro on relief that there was progress in Greek bailout talks. The dollar index is currently trading at 95.53 points.

However, with a strengthening dollar, the euro has been falling and European investors are said to be heavily buying gold in US SPDR, the largest exchange traded fund in the metal. The holding was 804 tonnes early this month and 868 tonnes on Tuesday, a large part of the rise said to be due to buying by European investors, who see gold as a safe haven. The SPDR holding was only 630 tonnes in mid-December, since when investors have been buying gold.

However, despite Western investors buying gold, two of the largest markets, India and Asia, have seen lacklustre demand in recent months. Bernard Dahdah, precious metals analyst at London-based Natixis, said: “We are especially concerned for gold prices in the near term. The price rally that we have witnessed since the start of the year has overwhelmingly been one that has come from Western investors. Investors from that region are especially sensitive to the opportunity cost of holding the metal. Asian demand has been noticeably absent since the start of the year.”

China and India together account for 45 per cent of global demand; Asian demand accounts for 65 per cent of the total. The trend in India suggests demand continues to remain dull — the discount in the spot market to the landed cost of gold is still over one per cent or $13 an ounce (NCDEX poll), indicating dull demand.

Imports in India last month were around 30 tonnes; it was also weak this month. In February and March, too, when gold prices were rising, our import was low. Among other precious metals, silver was up 0.3 per cent at $16.25 an ounce, after dipping to a five-week low of $16.14 earlier in the session.

Palladium was up 0.3 percent at $533.80 an ounce, off a 12-week low of $528.97 reached earlier in the day. Platinum was at $998.40 per ounce, up 0.2 per cent, after touching a five-week trough of $992.