Signs of stronger U.S. economy diminish gold’s ‘safe haven’ status

Gold prices are likely to drop further in the coming weeks, and may even fall to Rs.24,000 from the current level of about Rs.27,000 per 10 grams. Bullion experts feel the fall may be precipitated by a number of factors.

Internationally, signs of a stronger U.S. economy have diminished the gold’s ‘safe haven’ status, and money is being diverted to investments such as equities, said C. P. Krishnan, whole-time director, Geojit Commtrade, a commodity trading outfit. “There is a negative bias for gold, and in India, the booming equity market and stronger rupee point to a lower fancy for gold. However, at Rs.24,000, investors will enter.’’

In the domestic bullion market, gold has reacted about 10 per cent from Rs.30,300 in early May while international gold has reacted from $1,315 to $1,250 per ounce over the same period. “It could head towards the $1,100 level,’’ he said.

Gold in the domestic markets has traded at a high premium over international markets ever since the Reserve Bank of India (RBI) introduced restrictions on import to combat the high current account deficit (CAD) in July, 2013.

But, with a more stable rupee, the RBI eased some controls, and this led to prices dropping significantly.

Gold premiums, peaked at $160 per ounce in end 2013, have come down to $50 levels, said Harish Soni, Chairman, All India Gem & Jewellery Traders Federation (AIGJF), who felt weak demand could persist till the festive season begins in September. “This is slack season and investors are not active.’’

The new government might cut the import duty from current 10 per cent levels in the coming weeks and a cut of 2-3 per cent in duty could lead to another sharp correction in domestic gold prices, according to Kishore Narne, Assistant Director & Head, Commodity, Currency at Motilal Oswal Commodities Broker.

“On the downside, we believe that even a 3 per cent cut in import duty will lead to gold prices falling to around Rs.25,000 levels from the current levels. Additionally, if international prices start to crack as we expect or the rupee appreciates further, domestic prices could fall below Rs.25,000 over the next few months.’’

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