Little enthusiasm for precious metals

The year 2016 again disappointed gold investors, with most of the returns in the initial three quarters getting washed away in the past two months. While the year has still ended with good returns after three years of losses, there is little enthusiasm going into 2017. Rising interest rates in the US, leading to a stronger dollar and, falling demand in two major countries — India and China — due to measures by their respective governments, are key to why gold might not do well. Silver did better than gold in 2016 due to a sentimental recovery in base metals and this should continue.
 
In 2016, gold returned nearly 12 per cent in rupee terms and eight per cent in dollar terms. The rally was largely supported by financial investors, especially those of exchange traded products, and to a lesser extent by consumer demand or central bank buying. The trend could change for the worse.
 
Nigam Arora, financial market expert and author of Arorareport, says, “There is danger of gold falling below $1,000 (an ounce). Major negative factors are likely to be a strong dollar, rising interest rates, US and Russia reset to control global hot spots, China restricting gold imports to reduce capital outflows and Modi’s continued war on black money.” The Arora Report ratings on gold, used globally, are issued in six time frames and, “We say the medium-term is negative” for gold, he added.
 
For 2016, barring January, October and November, gold demand was dull. Even the official gold import figure for 2016 is estimated at only 492 tonnes (905 tonnes in 2015) by GFMS, the lowest since 2003. After demonetisation, since most gold purchases in India are in cash, demand is estimated to remain low. With gold demand looking weak from India and China, together account for more than half of global demand, looking weak, gold is unlikely to see gains.
 
Kunal Shah, head, research, Nirmal Bang Commodities said, “ A hawkish stance by the US Federal Reserve, expectation of three rate hikes, real positive rates and weak demand from India and China have resulted in massive correction in gold. We believe gold can go down further to below $1,100-$1,080, but we don’t see it falling beyond that point. Major triggers for gold will be how inflation picks up in the US and whether Federal Reserve continues with its hawkish stance.”
 
Arora, however, see cross currents in gold. He says, “Gold will have positive and negative cross-currents but on balance, the bias will likely be negative. The positive factors will be higher global growth, inflation, China flexing its military muscle and a potential trade war.”
 
On the whole, analysts differ on the levels gold can fall to in 2017, not on the trend.