Gold prices appear to be in correction mode. Over the past 10 weeks, prices of the precious metal in the international markets have fallen by nearly 4.5 per cent from $1,753 an ounce to $1,677, while Mumbai’s spot market prices are down from Rs 32,500 per 10 grams, the all time high achieved on November 26, 2012, to Rs 30,290 per 10 grams. In India, the fall has been steeper due to a strengthening rupee, which brings down cost of imports and hence local prices.
Rising equities prices are to be blamed for the fall in the international price of gold. The benchmark indices in several emerging and developed markets are trading at multi-year highs. With visibility of growth over the horizon, fund managers are taking money out of safer asset classes such as gold and deploying it in the riskier equity market. Incremental funds, which are necessary to keep prices higher, are finding their way into equities instead of gold.
International gold prices have an impact on India’s economy, especially its rising current account deficit (CAD). According to the government, rising gold imports have been one of the main contributors of the country's high CAD. In order to discourage imports of the yellow metal, government had increased its import duty by 2 per cent, which adds around Rs 600 per 10 gm on the landed price of gold. With this duty, gold in India becomes dearer by Rs 1,800 per 10 gm.
Without getting in the debate of the quantum of duty imposed, the government will be the biggest beneficiary at the cost of consumers. At the current rate of imports of 800 tonnes of gold imports a year, government earned over Rs 9,000 crore. With the imposition of an additional 2 per cent, their revenue is likely to increase to over Rs 14,000 crore, assuming imports continue at the same rate.
Looking at gold prices from a consumer’s point of view or from its price performance, gold prices have fallen below the levels prevailing ahead of duty hike. This means duty impact has been nullified though cost of imports remains elevated to the extent of duty. But at lower prices investment demand is expected to pick up.
What is the price outlook?
There are reports that in the futures market, punters have taken bearish positions targeting Rs 28,500 per 10 gram. They believe gold may revisit its 52-week low level of $1,527. Bullion punters are expecting the rupee to strengthen to 52 and become even stronger in the coming months, which will result in lower gold prices.
They are finding some support to their premise from the World Gold Council (WGC), a body formed by gold miners to promote use of gold. A recent report titled ‘Gold Investor’ says that gold demand outlook in the near term looks fragile.
Global growth-brighter but fragile. Q4 (Oct-Dec 2012) provided welcome signs of economic recovery in several countries, most notably in the US and China. Yet, there are still lingering economic difficulties, which may keep market risks elevated, constrain efforts to reduce sovereign- and private-sector indebtedness, and act as a brake on corporate-sector profit growth. But the role of sentiment should not be underestimated as it could provide an additional boost to economic activity in 2013.”
This observation is seen in the market as a moderation in gold demand in coming months which explains the correction in prices.
If prices moderate further, as expected and when signs appear that it will not fall further, demand will emerge as Indians have not lost love and faith in gold yet. Imports will thus move higher irrespective to whatever happens to the current account deficit.
Already imports of raw gold is on the rise because import duty on refined gold is 6 per cent while raw gold or dore bars attracts 5 per cent duty. This is giving business to Indian refineries and there are unconfirmed reports that some more players in bullion markets are planning to set up refineries to refine gold.
WGS’s observations, punters positions and global fund managers’ preferences for equities suggest that gold prices could moderate further. However, government’s efforts to curb gold import will not succeed unless there is conviction that prices will not rise and may keep falling of which there are no signals from market yet.
