Gold reclaiming safe haven status, but high prices may dent demand in India

In India, the worsening current account deficit has raised fears of an increase in import duty of gold

In the last four months, gold prices found support between $1,170-1,180 three times, indicating that the market will not allow the yellow metal to go down further. In the last two days, gold prices rebounded two per cent in the international market and observers see volumes peaking up in the yellow metal in Comex, which reflects safe haven buying.   

Gold prices have recovered in the last two days by two per cent and the yellow metal is trading above $1,200, while in India, the price for standard gold is around Rs 31,000 again, showing a sharp recovery in the last six weeks following the rebound in international gold and fall in the rupee against dollar. In the last six weeks, the Mumbai standard gold price has increased 5.6 per cent (the rupee fall was 4.3 per cent), compared to the 1.5 per cent jump in global prices. 

On Wednesday, standard gold closed in Mumbai at Rs 31,060 per 10 grams, which was Rs 535, or 1.75 per cent, higher than on Tuesday. Silver closed at Rs 38,490 per kilogramme. 

For over a year, the dollar was considered as a safe haven and money from everywhere was moving to it. With a trade war emerging, the Iran sanctions and other developments, gold was not preferred as a safe haven by global institutional investors. However, globally, central banks have been adding the yellow metal to their forex reserve kitty. 

Gnanasekar Thiagarajan, director at Commtrendz Research, said, "Market seems to be pricing in dollar strength, which was due to its demand as a safe haven. Going forward, the dollar may end its strength and even the US Federal Reserve may pause after interest rate hike may take a pause after December. In that scenario, gold will be back to play its role as a safe haven."

The dollar index has been hovering around 94-95 level for a long time now. However, crude oil prices are rising consistently and are now at a four-year high, which is raising inflation fears. Further, the trade war triggered by the US is getting ugly and rising to a level that could hurt global growth momentum. 

In a scenario where the trade war is spreading and crude oil prices are approaching $100, it will be difficult for the US Fed to keep increasing interest rates next year. "All these are signs of bull run in the yellow metal," said Gnanasekar. 

In India, however, the worsening current account deficit has raised fears of an increase in import duty of gold. In the September quarter, gold import is estimated to have increased by 50-60 per cent compared to 139 tonnes of import in the September 2017 quarter. However, analysts said that last year, most of the import took place before GST was implemented and fell from July 2017. Therefore, the September quarter imports are not comparable.  

Chirag Sheth, consultant, Metal Focus, said, "Gold demand is weak currently due to pitru paksha and, in December quarter, marriage days are lesser compared to last year, which will also impact demand." This year, due to the extra month in the Hindu calendar, the marriage season, which starts in mid-October, is starting from the third week of November.