Gold prices to fall further on rupee gains

Rupee has hit eleven month high against dollar which has caused price of gold to also drop as it is a dollar denominated commodity

Gold prices are set to drop further in the domestic market, owing to the rupee’s appreciation. Last week, the Reserve Bank of India (RBI) had eased import norms for gold; it is expected the move will continue to have a bearing on prices. RBI also allowed some trading houses to import gold; it is expected this will increase the availability of gold in the domestic market.

RBI’s moves led to gold prices falling by Rs 1,250 to Rs 27,950/10g in the domestic market.

On Thursday, the rupee hit an 11-month high of 58.46/dollar, which led to a drop in gold prices. On Friday, however, the currency pared some of its gains.

Last week, the World Gold Council (WGC) brought out its March quarter estimate, according to which India’s gold imports fell 26 per cent to 129 tonnes, owing to unfavourable import policies that resulted in consumers and investors postponing purchases.

Last year, import curbs for gold were put were put in place to reduce the country’s current account deficit (CAD). Now, as CAD is under control, the new government is expected to bring about changes in import duty norms.

“In the coming week, I expect gold prices in the domestic market to fall to Rs 26,800/10g and, in the medium term, to Rs 25,000/10g, as the government will ease gold import norms; also, it might bring in some duty cut,” said Sugandha Sachdeva, associate vice-president, Religare Commodities.

Once prices fall in the coming days, pent up demand for gold is expected to resurface, as investors and retail participants have stayed away from the market due to high prices. The rise in demand will likely provide some cushion to gold prices in the coming weeks.

WGC expects gold demand to pick up in the second half of this year, and the overall demand to stand at 900-1,000 tonnes. Last year, gold imports stood at 950 tonnes.

“There is no positive trigger for prices in the domestic market; also, the rupee will continue to remain the major deciding factor for the yellow metal. Next week, prices will see Rs 27,000/10g as a major support level,” said Naveen Mathur, associate director (commodities and currencies), Angel Broking.

In the international market, too, there is no trigger for prices to rise. The Ukraine crisis has already been factored into gold prices. Analysts say $1276/ounce is a major support level for the commodity.