Gold may lose sheen on weak fundamentals

MARKET OUTLOOK

Gold is likely to decline further this week as the recent drop in energy prices will reduce its appeal as a hedge against inflation. The price of the precious metal is set to ease below $905 an ounce (oz) and if this psychological barrier is breached, it may even touch $888.

“Gold may drift 6-7 per cent lower in a fortnight on weak fundamentals surrounding the entire energy and precious metals basket. In India, however, the weak sentiment may stretch till the inflation crisis is dealt with,” said Jayant Manglik of Religare Commodities.

Fundamentals are weakening. The dollar is falling against major currencies. The prices of energy, especially crude oil, are seeing a decline. With the easing tensions between the US and Iran, oil prices are set to remain subdued in the weeks ahead. Gold moves in tandem with crude oil.

The absence of any major festival in India, the world’s largest consumer, has also impacted the demand for the yellow metal. “Consumers are holding their investments as of now, considering that prices would decline further. The demand scenario, which was normal in the last one month, has now dried up completely,” said a trader at Zaveri Bazar, the hub of gold sales in Mumbai.

Last week, gold dropped as much as $40 or 3.9 per cent following the tumbling oil prices and rising dollar. In London, the spot gold declined to $927. Funds are shifting their focus from commodities to other investment options as crude oil, platinum and gas are witnessing a decline in prices.

Crude-oil futures have slipped about 17 per cent from the record highs of July 11. But crude has still gained by 71 per cent in the past year as gold climbed 35 per cent. Gold touched a record $1,033.90 an oz in March. The yellow metal typically moves in tandem with crude as it is bought as a hedge against oil-led inflation.

On Friday, the US currency rose against the yen after a government report showing an unexpected rise in durable goods orders and a stronger-than-expected US consumer sentiment for July eased worries over the country’s economy. A stronger greenback usually pressures gold, which is often bought as an alternative investment to the US currency.

On the Multi Commodity Exchange (MCX), the gold April 09 contract receded by 5.56 per cent to Rs 12,900 per 10 grams and gold August 08 contract by 5.28 per cent to Rs 12,624 per 10 grams for the week ended Thursday. The Gold M October 08 contract was down 5.56 per cent at 12,716 per 10 grams. Gold guinea July 08 contract fell by 5.21 per cent to Rs 10,137 per 8 grams.