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After an unsurprising price decline during the calendar year 2013 as widely predicted earlier, this year so far has been like a breath of fresh air for gold bugs with smart increases in dollar as well as rupee terms. But the previous year's fall of 30 per cent in dollar terms, which matched a record of more than 30 years ago, did add a surprise element and the chances of year-ago prices being achieved is extremely unlikely.
The primary reasons attributed for the recent increase in gold prices are the usual ones - weak global equities and lack of confidence in the US economy based on recent data. So the the dollar fell against major currencies and demand for gold rocketed. Of course, the tapering of bond purchases has more or less been factored into the price though any increase in the US interest rates will certainly set the cat among the pigeons. But if by chance or design the tapering is slowed, halted or delayed, then gold prices can once again look to get very firm though the minutes of the Fed's January 28-29 policy meeting clarified that the asset purchase programme would move as planned. Global physical demand actually fell in 2013 by 15 per cent, according to a recent report by the World Gold Council, as funds flowed from exchange-traded funds towards equity markets due to strongly positive macroeconomic outlook.
As usual, Asia bucked the trend. Lower gold prices from the second quarter helped give a fillip to demand in Asia. China overtook India in gold imports on the back of retail demand, but in spite of duty curbs, Indian imports were more than in 2012 with a significant 13 per cent leap. That is certainly a story for the government to consider as the unofficial channels will definitely get active to meet the demand. The interim Budget did not address this issue and the 10 per cent import duty remains as it is. This has also helped to keep gold expensive in India. Gold demand in China and India remains largely price-inelastic and man-made taxes have rarely been sustained deterrents to consumption because of cultural links going back thousands of years.
In addition to retail demand in Asia, the other silver lining has been in the form of demand from central banks. But physical demand is just one factor and gold prices are driven mainly by other dynamic elements.
So it was really the expected increase in the strength of the dollar due to tapering, which suppressed gold prices in 2013.
The reason for weak prices ending calendar year 2014 will likely remain the same and this year will see similar factors affecting gold prices in terms of rupee. First off is the tapering effect, which will see a strengthening dollar and lower dollar-gold prices. But most of this will be offset by a weaker rupee which will make for relatively more expensive gold.
Like last year, the longer term seems easier to call and will see lower gold prices. But I expect volatility before that as domestic and international news will combine to form an interesting mix. The price outlook will depend on a combination of the strength of the dollar, global interest rates, inflation and the worldwide security situation, which will be driven by a combination of the US, European and Chinese economic data, emerging market news and prospects of peace in West Asia. That's complex but with disclaimers firmly in place, I would look at a target of Rs 31,500 per 10g in the near term, i.e., around the elections.
And I don't expect a gold bull market this year or the next.
The author is president, retail distribution, Religare Securities
