Gold price meltdown points to its waning lustre

Historically, gold buying has been fuelled in a scenario when the U.S. dollar has been weakening. This is how gold came to be bestowed a ‘safe haven’ status.

The sharp decline in gold price early last week and the subsequent tepid buying of the metal in international markets point to gold’s clear falling out of favor among investors at least for now.

Gold fell below the $1,100 per ounce level and sought its lowest point since April 2010 while in India, it slid below Rs 25,000 per 10 gram levels, falling to its 5-year lows.

An improving U.S. economy, a consequently stronger dollar, an expected rise in interest rates by the U.S. Federal Reserve and an expected slowing of demand for gold from China have been attributed as key factors for the bearish streak last week. Exchange traded funds (ETFs) too were selling gold.Historically, gold buying has been fueled in a scenario when the U.S. dollar has been weakening. This is how gold came to be bestowed a `safe haven’ status.

"The U.S. dollar has proved to be the best performer against the major basket of currencies as the receding concerns over Greece and the Federal Reserve Chain Janet Yellen’s strong intentions of a probable rate hike this year prompted investors to keep their focus on the safer currency, the greenback," said Ravindra Rao, Head – Commodity Research, AnandRathi Commodities.

As India follows international gold prices and imports all its gold requirements, the fall was suitably reflected. But other factors are at play here.

The festive season when gold buying is usually a norm, is still several weeks away and consumption demand is thus very low.

"Investor demand is being seen in some small measure by those are seeking to average out earlier purchases," Surendra Mehta, secretary, India Bullion & Jewellers’ Association (IBJA) said, adding that usually, every fall in price is seen as a buying opportunity by investors but this time around, there is poor investor interest.

"There is no urge to go in for gold buying and it seems to be considered more prudent to hold on to dollars and sell gold first. Gold prices are set to fall further."

According to World Gold Council, fall in gold prices has boosted demand in India, despite the summer months being a traditional quiet period.

ramnathsubbu.r@thehindu.co.in