Gold no longer attractive for investors, consumption demand stable

Gold fell by more than 26% from its August 2013 peak of Rs 35,074/ten gm to Rs 25,500 on Wednesday. It has been on a downward slope for the last three consecutive years since January 2013, and the current month too is no exception with heavy selling seen at higher levels.

The main reasons for the sharp decline have been drop in investments and migration to other assets like equities and debts besides the falling inflation levels in key global markets following the slowdown in economic activities.

Globally, gold prices have been falling in major markets such as US, China, Euro zone and China due to the twin impact of declining inflation and the strengthening of the dollar. Inflation levels in most major markets are currently below 2%, and in the US and Europe at around 1% level, bullion dealers said.

The dollar index, a barometer of dollar strength against six major currencies, has been on an upward climb from 97.82 since mid December 2015 following the US Fed rate hike of 25 basis points. The index currently is at 99.16, indicating a further strengthening of the dollar and continuity of gold slide, dealers said.

"The US rates have gone into a `lift-off' mode and costs of commodities have hence turned expensive leading to a sell-off in gold globally," said K Harihar, treasury head at FirstRand Bank.

Most dealers echoed similar views that gold was no more an inflation hedge in view of the falling inflation rates due to economic slowdown.

In India, however, the rupee weakening against the dollar has put buyers at a disadvantage even though global prices have been declining in dollar terms.

When gold traded at $1,172/ounce in October 2014, the rupee was then around 61.60 to the dollar as against the fall, a year down the line, at $1,141 when the rupee became sharply expensive at 65.60. Partial offset of the falling prices were hence seen by the rupee depreciation.

"What is noteworthy is that investors are out and during Diwali festival in October, gold was trading at a discount of $9 at $1,140, the first time in 25 years," said Ajay Kedia of Kedia Commodities.

"In the previous year gold traded at a premium of $140 at $1,172, this clearly indicates that investment demand was at its ebb and would remain so in the near future," he said.

For India, gold is largely purchased for consumption and price has always been the key deciding factor, irrespective of which way the inflation goes.

"We have seen a pick up in demand whenever gold touches Rs 25,000," says Kedia.

"Price remains the dominant factor for gold consumption in India and demand would pick up whenever prices fall," said Harihar.

Imports of gold despite a duty of 10% has not fallen and in the last five years has been averaging at 920 tonnes annually.

For CY2015, imports are estimated to be around 970 tonnes as against the previous year's 920 tonnes.

"In our view we expect gold to trade with weakness in 2016 but prices will stabilise after June 2016. We would not be surprised if prices test Rs 22,000-Rs 22,800 per 10 gm range in first half of 2016, which is when physical demand could pick up," said Kedia.