 "Could test $1,075-1,100 levels")
In 2013, gold prices witnessed the sharpest decline since the past three decades. Prices of the yellow metal fell by 30 per cent in terms of dollar but eight per cent in rupee terms. The bullish trend in gold prices can mainly be attributed to accumulation of gold in the form of bars and exchange-traded funds (ETFs) after the credit crisis of 2008. Also, western central bankers adopted unconventional monetary policy to pull the global economy out of the worst financial crisis since the Great Depression of 1929, which drove investors to gold.
People buy gold because of two reasons. One is love and the other is fear. While Indians love gold and purchase it mainly from a traditional point of view, westerners buy it as they fear inflation and hyperinflation. In fact, despite massive liquidity measures, inflation did not move up as much as central bankers wanted it to. Besides, the economic scenario, too, had started to improve.
The simplest way to understand the fall in gold prices is SPDR (an exchange-traded fund managed by State Street Global Advisors that tracks the Standard & Poor's 500 Index) gold trust holdings. In 2008, SPDR funding was 780 tonnes, which peaked out in December 2012 at 1,350 tonnes and in the last year, there has been constant redemption in SPDR gold trust's holdings. As of 31 December, 2013, it was 790 tonnes. The accumulation of nearly four years was shed in a year. The moment investors started seeing growth in the global economy, the fear trade was off. Investors also started selling gold when they realised inflation was not moving up as expected, despite the huge bond purchase programme by the US.
The theme for 2014 is strong economic growth in the US, which has led to tapering of bond purchase programme and recovery in the global economy. Investors seem to be more confident about the global economy than they were a year ago. And with further improvement in the US economy, 10-year US bond yields may shoot up to 3.3- 3.5 per cent, leading to more selling pressure in gold.
Further, change in monetary policies or expectations of any change in monetary policies in the US will be the key factor to watch out for in 2014 since gold prices are dollar-denominated. After massive outflows in 2013, the pace of redemption in gold ETFs may moderate.
We do not recommend shorting gold at these levels. Due to the Chinese lunar holiday, we expect demand for gold to remain strong from China in the first quarter. Tighter liquidity conditions in China and large government debt requires more fiscal discipline, which may slow down growth and cause a spike in demand for gold.
There is likelihood that gold may again test $1,300-1,330/ounce, which could be good levels to initiate short positions. We expect gold to test $1,100-1,075/ounce during 2014. From a domestic perspective, we should be mindful of the ongoing compression in gold imports, as this cannot go on forever. Whenever these restrictions are lifted, the premium in the spot market may drop. Moreover, if the rupee again depreciates to the level of 64 due to tapering-led outflows, we may see a maximum upside till Rs 30,500/10 g on the domestic bourses and on the downside it may test levels Rs 26,500-27,000/10 g 2014.
The author is head of commodities research, Nirmal Bang Commodities
People buy gold because of two reasons. One is love and the other is fear. While Indians love gold and purchase it mainly from a traditional point of view, westerners buy it as they fear inflation and hyperinflation. In fact, despite massive liquidity measures, inflation did not move up as much as central bankers wanted it to. Besides, the economic scenario, too, had started to improve.
The simplest way to understand the fall in gold prices is SPDR (an exchange-traded fund managed by State Street Global Advisors that tracks the Standard & Poor's 500 Index) gold trust holdings. In 2008, SPDR funding was 780 tonnes, which peaked out in December 2012 at 1,350 tonnes and in the last year, there has been constant redemption in SPDR gold trust's holdings. As of 31 December, 2013, it was 790 tonnes. The accumulation of nearly four years was shed in a year. The moment investors started seeing growth in the global economy, the fear trade was off. Investors also started selling gold when they realised inflation was not moving up as expected, despite the huge bond purchase programme by the US.
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The problem was accentuated by the US Federal Reserve's plans to taper its bond purchase programme. Before the tapering of the bond purchase programme by the US, gold prices had corrected sharply. Further, the gold market received another blow when the Indian government, led by its apex bank, the Reserve Bank of India, undertook a slew of measures to curb the demand for gold in FY14, resulting in a sharp drop in gold import. Simply put, sale of ETFs and the absence of robust demand from India were the prime reasons for the correction in gold prices in 2013.
The theme for 2014 is strong economic growth in the US, which has led to tapering of bond purchase programme and recovery in the global economy. Investors seem to be more confident about the global economy than they were a year ago. And with further improvement in the US economy, 10-year US bond yields may shoot up to 3.3- 3.5 per cent, leading to more selling pressure in gold.
Further, change in monetary policies or expectations of any change in monetary policies in the US will be the key factor to watch out for in 2014 since gold prices are dollar-denominated. After massive outflows in 2013, the pace of redemption in gold ETFs may moderate.
We do not recommend shorting gold at these levels. Due to the Chinese lunar holiday, we expect demand for gold to remain strong from China in the first quarter. Tighter liquidity conditions in China and large government debt requires more fiscal discipline, which may slow down growth and cause a spike in demand for gold.
There is likelihood that gold may again test $1,300-1,330/ounce, which could be good levels to initiate short positions. We expect gold to test $1,100-1,075/ounce during 2014. From a domestic perspective, we should be mindful of the ongoing compression in gold imports, as this cannot go on forever. Whenever these restrictions are lifted, the premium in the spot market may drop. Moreover, if the rupee again depreciates to the level of 64 due to tapering-led outflows, we may see a maximum upside till Rs 30,500/10 g on the domestic bourses and on the downside it may test levels Rs 26,500-27,000/10 g 2014.
The author is head of commodities research, Nirmal Bang Commodities