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5 reasons why gold prices could crash further

From taper tantrums to rising interest rates, here's why the yellow metal is losing its sheen

Nikhil Inamdar  |  Mumbai 

Gold jewellery

Gold prices edged towards 4 month lows today and have lost 27% in dollar terms on a YOY basis. Domestically prices continue to be at a premium, remaining almost flat this year due to depreciation in the rupee and government curbs on imports squeezing supplies and providing some cushion. But prices are set for a correction according to market experts who are looking at a confluence of factors that point towards more bearishness creeping into the bullion market.

ALSO READ: Gold jewellery exports fall 6.9% in October

Here are 5 reasons why the yellow metal could be set for an imminent price correction –

#1 The Fed Taper

Minutes of the Federal Reserve’s meeting showed last week that the US central bank could start scaling back its massive asset purchase program at one of their next few meetings. A pull back of free liquidity is negative for gold which was boosted by Fed’s QE (quantitative easing) because of the metal’s status as a hedge against inflation. A Fed taper also has implications on the dollar which is expected to appreciate against other currencies, thus propelling a fall in gold prices which are inversely correlated to the greenback.

#2 Rising interest rates

Gold always benefits from lower interest rates, so in a scenario of rising yields, gold is expected to underperform. Benchmark US treasury yields are firming up, trading around 2.7% and are expected to move up further by as much as 200 basis points according to some estimates. This will push investors to reallocate their assets from gold into US treasuries to chase higher returns.

#3 Losing safe haven appeal

“There is no incremental demand for safety as the broader economy shows signs of revival” says Kishore Narne – Head of Currency & Commodity at Motilal Oswal. Economic data and jobs reports from the US and Europe point towards a gradual improvement in the global economy with the Eurozone officially exiting recession in the 2nd quarter. While the OECD recently cut its global growth forecast, it was on account of a slowdown in emerging US growth forecasts were maintained and the OECD expected Europe to contract at a smaller pace than earlier expected. Easing off of geo political tensions in the Middle East, and the recent deal with Iran also reduces gold’s appeal as a safe haven bet.

#4 Physical demand ebbing

While China continues to show incremental demand, the world’s largest consumer, India is losing appetite for gold due to various government curbs like increased import duties. There is also outflow in gold ETFs that’s pressurizing bullion prices. Holding of SPDR Gold Trust, the world’s largest gold backed exchange traded fund fell by 3.6 tonnes, the lowest since 2009 according to a report in The Hindu which also states that total outflows from gold have been 450 tonnes this year. Eligible gold stocks sitting inside U.S. exchange warehouses have risen to a seven-month high according to Reuters. This is another sign that physical demand has weakened.

#5 Negative returns, shift to equities

“This is the first time in a decade that gold has given negative returns on a YOY basis. This will have a sentimental impact on investor appetite” says Narne who expects bullion prices to fall to Rs 28,000 levels. While jewelry demand continues to remain buoyant, increasing 5% YOY for Q3 FY14 according to the World Gold Council, investment demand is expected to remain muted. A global rally in equities is further reason for gold to remain under pressure. "Recently, risk-partiality has increased following gains in assets such as equities...We believe that investors will lose interest in gold and rush to risky assets." Chen Min, a analyst at Jinrui Futures told Reuters.

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First Published: Mon, November 25 2013. 14:11 IST