Gold hits four-year low, recovers

Spot gold was seen trading last at $1,197.2 an oz, a marginal rise from the previous day's close at $1,191 an oz

After hitting a four-year low on Monday, spot gold in London recorded a smart recovery in the late afternoon trade thanks to brisk buying by wary investors on expectations of a rebound in prices.

Gold extended the fall in early Monday trade to hit the four-year low of $1,180 an ounce (oz) on investors’ pulling off funds to invest in rising equity markets. However, the precious metal rebounded later in the day with investors rebuilding their positions they had offloaded earlier. Spot gold was seen trading last at $1,197.2 an oz, a marginal rise from the previous day’s close of $1,191 an oz.

“Gold demand has been very weak this festive season with preferably need-based buying from stockists. Bullion dealers are booking only on orders amid fears of loss in case price falls further. Therefore, gold is unlikely to glitter this Diwali,” said Rajan Venkatesh, managing director of ScotiaMocatta, the bullion division of Bank of Nova Scotia, India's largest gold importing bank.

While the mood in the jewellery retail sales remained upbeat in show rooms with higher footfalls across the city, liquidity crisis has been a major cause of worry for fresh gold purchase. Exchange of old jewellery with new ones has been rampant this festive season.

Somasundaram P R, managing director (India), World Gold Council, expects India’s gold demand to rise 8-10 per cent during the October-December quarter on the back of festive and seasonal buying.

The sustained fall in gold prices from its peak of $1,951 an oz in 2011 has threatened the metal’s claim as a hedge against inflation. Strengthening dollar is the major driver for waning investors’ interest in gold and other bullions including silver, which has fallen multi-year low to test $16.5 an oz on Monday. Global bank Barclays Capital, however, relies upon gold’s cost of production and physical demand to determine its future price guidance. While the cost of production defers depending on location and type of gold mines, its average works out to $1,200 an oz. Sustained fall below this level will prompt miners to cut production and, therefore, supply issue would come into play.

Somasundaram denies any de-hedging by miners, which indicates a recovery in prices. Global gold miners continued hedging of their output, suggesting that the bullion would remain under pressure going forward. Gnanasekhar Thiagarajan, director, Commtrendz, forecasts gold to hit $1,050 an oz by March 2015 after initial volatility.

In India, premiums on physical gold sales are also on the rise to $15-20 an oz now against $10-12 an oz a week ago.