Shining bright: Record high prices to weigh on demand for gold

Domestic prices are up 8 per cent in the last fortnight; international gold price trades around $1,970 after breaching $2,000 on Monday

The demand for gold is expected to take a hit if the price of the yellow metal -- which has been hovering around Rs 60,000, a level never seen before -- remains elevated.

Because of a sharp increase in price in a very short time and the flow of smuggled gold continuing, gold price in Mumbai is quoted at around Rs 59,000 per 10 gram.

Typically, overall demand in the January-March and July-September quarters is moderate-to-dull, which is the case in the ongoing period. However, this along with prevailing high prices ahead of April-June quarter, which is strong due to the marriage season and Akshaya Tritiya, this year may see low gold demand after a robust 2022.

Gold price has remained volatile with an upward bias in the current quarter. It fell in the early part of 2023 on expectations that the Fed will cut rates and inflation may come under control. But, in less than two weeks, gold prices in the international market have jumped 10 per cent from levels of $1,810 an ounce, touched a high of $2,010, before settling around $1,970 currently. The recent gains follow several events that have led to gold buying for its safe haven character.

Domestic prices have also jumped 8 per cent in Mumbai's Zaveri bazaar.

Gold prices are rising following the fall of US-based Silicon Valley Bank as well as Switzerland-based Credit Suisse. With some easing of the crisis, experts see gold demand moving on the slow track.

Traders say that the rise in gold prices seen in the last few days was completely unexpected and the market is trying to price in the developments which forced investors to look for safe haven and the current price surge is a knee-jerk reaction.

As of now, prices have corrected from the intra-day high level of $2,009 per ounce because globally central banks have been quick in responding to emerging challenges. The Swiss central bank’s push to UBS to take over ailing Credit Suisse is a key example. 

Chirag Sheth, Principal Consultant, India and South Asia at London-headquartered research firm Metal Focus, said, “There is a slowdown in demand at the higher level and the (Indian) market price is quoted at a discount to the cost of import. March is usually a dull month for gold demand. At high prices, even impulsive and regular gold demand gets affected.”

The marriage season demand usually is sizable, but if prices remain high some erosion to that segment’s demand does happen, Sheth adds.

Gold imports into India are already falling.

March imports are expected to be hardly 40 tonnes. Smuggled gold supply is said to be continuing, thereby keeping prices at a discount to domestic market. While the April to June quarter usually sees good demand, the prevailing price level then will determine the demand. 

Will prices correct from the current level or will it stay high?

The answer lies in the move by the US Federal Reserve, which is meeting and announcing its decision on interest rate on Wednesday (late evening India time).

Somasundaram PR, Regional CEO, India at World Gold Council says, rural demand may be impacted but in urban areas digital gold buying will catch up.

He said, “Price pressures could keep rural demand subdued. Urban buying and digital gold accumulations which permit flexible low-ticket sizes could be emerging stories during this festive season.”

He, however, is optimistic about demand for 2023.

Somasundaram said, “As economic growth influences demand significantly and this gets reflected in gold purchases on such auspicious days, demand is poised for good growth in 2023.”

Nigam Arora, author of Arora Report and leading US based algorithm analyst said, “The main factor driving gold price will be the Fed Reserve. If the Fed starts cutting interest rates rapidly and inflation stays high, there is a high probability of gold breaking through the resistance zone of $2,016 to $2,063 and moving towards $2,400.”

But, on the other hand, if the US Fed continues to raise interest rates, the gold price will retreat to about $1800, Arora said.

While rate actions of the Fed will be watched, the market is also awaiting the central bank’s commentary to get clues on what lies ahead.