Gold may hit $1,330/oz on strong demand

However, the level may not sustain on low investment demand

This quarter, gold prices could rise five per cent to $1,330/oz, owing to strong physical buying and robust fabrication demand, a Thomson Reuters GFMS study has said.

“It is possible for gold to touch $1,330 an oz before the current quarter is over. The gold market has not regained the sparkle of 2008-late 2011, and is not expected to do so this year, too,” the study said.

Currently, the commodity is being traded at $1,260 an oz in the London spot market, and at about Rs 30,000/10g in India. Given the 10 per cent import duty and $120/oz premium, the price in Indian market is at least Rs 1,300 higher for every 10g.

ALL THAT GLITTERS

• In 2013, China's jewellery fabrication rose 31% to 724 tonnes
• Net of scrap, global jewellery fabrication up 48%
• India's import restrictions constrained supply, led to rise in smuggling
• Official sector purchase slowed in 2013 and may slow further this year; central banks to remain net buyers

In 2013, China was the world's largest jewellery fabricating nation, accounting for 33 per cent of the fabrication across the world. China and India account for 51 per cent of the world's jewellery fabrication. Net of scrap, global jewellery fabrication gained 48 per cent year-on-year in 2013.

  While private investors showed a voracious appetite for gold in the wake of a sharp drop in prices, professional investors were absent from active buying, a trend expected to persist through this year. But a short-covering rally in the first quarter of this year isn't being ruled out and this could contribute to the recent stabilisation at  a little more than $1,185/oz.

Tapering of the bond-buying programme in the US by the Federal Reserve didn't have a major impact on the gold market, as prices fell in the second quarter. The result was while exchange-traded fund (ETF) investors sold 880 tonnes through 2013, bar hoarding in East Asia, the Indian sub-continent and West Asia stood at 1,066 tonnes.

It is expected tapering in the US will continue till the end of this year and by then, some interest rate guidance is expected to emerge. Improving economic fundamentals are expected to continue to improve investor appetite for risk and prevent hefty gold investment.

"With investment activity muted, gold is likely to show a more seasonal pattern than has been the case in recent years. This points to the possibility of a brief test of $1,000, should there be any further investor retreat in the second and possibly the third quarters of the year. But physical demand is expected to be robust enough to defend any test of this level and any such dip will be short-lived," said Rhona O'Connell, head of metals research and forecasting at Thomson Reuters.

Gold to take a back seat to other asset classes this year, but strong physical demand will sustain elevated average price this year. China was the world’s largest jewellery fabricating nation in 2013 with 33% of the world total, while Indian government restrictions choke off local growth; China and India form 51% of world jewellery fabrication. Net of scrap, global jewellery fabrication gained 48% year-on-year in 2013.