Signals from gold prices

The yellow metal dominated the world market scene all of last week. Gold slumped to a five-year low, slipping to an intra-day low-point of $1,072.30 by Friday. A late rally that day, however, pushed prices back to around $1,100 an ounce. At best, it helped pare losses from last Monday when the price slid to its lowest since March 2009, to $1,088.05 an ounce. The Comex gold futures for August still ended their fifth consecutive week in negative territory. Though the rally suggests that there could be an improvement in market sentiment, the bearish undertone persists among retail investors. At the moment, everyone in the international marketplace is wary of gold. Indeed, price movement is set for an uncertain phase, at least in the near-term. The reasons behind the slipping interest in gold is not difficult to fathom. A looming rise in the U.S. interest rate, for the first time in nearly a decade, is playing the villain. At the moment, a stronger dollar remains the topic that dominates discussions in the marketplace. An inadvertent release on a rate forecast on the website of the Federal Reserve, though it was subsequently withdrawn, only helped to confound the confusion. Understandably, all eyes are now on the Federal Reserve. Will it pull the trigger on rate hikes? Nevertheless, the dipping global oil prices hold hope for investors in gold. A protracted oversupply situation, weak demand, the Greek crisis and the Chinese market fall have all come together to pull oil prices down. The fall of oil could yet prove a rescuer for gold. If there is a serious consequential fallout on U.S. domestic inflation, the oil price fall could slow the Fed’s tightening policy. A sustained recovery in gold prices, it appears, is inversely related to the growth prospects of the U.S. economy.

What does the fall in gold prices portend for India? The country consumes 800 to 900 tonnes of the metal annually, and depends on imports to meet its entire demand. Gold and oil comprise a large part of India’s imports in terms of value, and consequently they are major contributors to the country's trade deficit. To an extent, the fall in gold prices could moderate the import bill in the near-term. There is a flip-side to this, though. A strengthening dollar could nullify the impact of the fall in gold prices. Indians have traditionally attached a sentimental value to gold. Given this, the government has to go the extra mile to coax them to park idle gold in banks and earn interest. The situation is tailor-made for the Central government to exploit this to its advantage. The proposed gold monetisation scheme, for example, must be made a lot more simpler and common man-friendly to aid this process.