Ind-Ra Maintains Negative Outlook on Domestic Gold Prices

India Ratings and Research (Ind-Ra) has maintained a negative outlook on domestic gold prices for FY16. The agency believes movements in gold prices will largely depend on the US' interest rate decision. In the event of a US rate hike, global gold prices could drop and range between USD900/oz to USD1,050/oz. As such, the domestic price of gold may decline and range between INR20,500/10gm- INR24,000/10gm from the current levels of INR27,000/10gm. Ind-Ra expects a higher rate hike to cause gold price to fall by 10%-25%.

However, if the US continues to delay the interest rate hike, while major economies such as Japan and the eurozone continue with their unconventional monetary policy (UMP), the price of gold could creep up and range from USD1,300/oz to USD1,350/oz in FY16. Correspondingly, domestic prices could also increase from current levels and trade in the range of INR29,500/10gm-INR30,500/10 gm. If major global currencies, other than the US dollar (USD), weaken because of economic concerns, even in the absence of a US rate hike, one may observe brief spells of simultaneous strengthening of gold price as well as USD. However, this is not a common occurrence.

Gold is often considered a 'hedge' against an economic uncertainty. The uncertainty regarding the global growth environment is best reflected in central banks across the world remaining the net-buyers of gold. The data available till end-December 2014 suggests that central banks were the net buyers of gold from 2008-2014. Till such time the uncertainty around global growth is reduced, the chances of international gold prices falling below USD900/oz corresponding to pre-2009 levels are remote.

Gold prices corrected by around 38% at end-FY15 after peaking to USD1,922/oz in September 2011. This coincided with the sell-off of gold inventory linked to pure investment products such as gold exchange traded funds. The gold inventory linked to financial products is at levels comparable to that in March 2009. A US interest rate hike may cause a further sell-off of gold inventory; however, it is unlikely to fall below the inventory level in the September-December 2008 period.

The overall global gold demand during the next 12 to 18 months is likely to exhibit a low single digit growth rate. This would be driven by muted global jewellery consumption as well as the continuation of the popular perception of reduced attractiveness of gold investments on the anticipated US rate hike. Gold mining (around 70% of the global supply) output, which has been ramped up since 2008, will have difficulty adjusting to the weak demand.

The agency believes that the local premium for gold in India will remain stable in FY16. Improved import supplies premised a substantial reduction in the FY15 local premiums. Local premium averaged to an estimated 1% in FY15 compared with 4% in FY14.

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