Five reasons why gold may plunge to below Rs 24,000 per 10 grams

MUMBAI: ‘Invest in gold’ is not a buzz-word anymore as the yellow metal has corrected in the international market after a 12-year bull-run. Once considered to be a safe haven, it has corrected from an all-time high of Rs 34,500 in last August to Rs 27,000 per 10 grams on the back of improving global economy.

According to bullion traders, in the short term prices are expected to continue on the downwards trajectory and may correct even to sub-Rs 24,000 levels.

US economy: Global investors rushed in to buy gold as a safe haven after the US economy hit a rock bottom. Prices soared to a high of $1,895 an ounce in September 2011 as the US was staring at debt ceiling crisis. Investors were worried that the US government might default and started selling the US dollar to by gold as a safe haven.

The US economy has since then started showing signs of improvement. The US Federal Reserve has scaled down its bond purchase program. Recently, in testimony in front of the US Congress, Federal Reserve chair Janet Yellen said the US economy is on the mend.

“With the potential for a stronger dollar, the need for an alternative safe-haven could also diminish, which can bring the prices in some consolidation phase in the short to medium term,” said Sugandha Sachdeva, AVP & Incharge- Metals, Energy & Currency Research at Religare Securities

Import restrictions: Even as the global prices corrected from all-time highs, the prices in the Indian markets remained high as the UPA government had imposed import restrictions in order to bring down India’s current account deficit and stem the rupee decline.

In July last year the RBI had imposed severe restrictions on gold imports to check the burgeoning current account deficit and depreciating rupee. Under the 20:80 scheme, an importer has to ensure that at least one-fifth, or 20 per cent, of every lot of imported gold is exclusively made available for the purpose of exports and the balance for domestic use. The recent easing of restriction on gold imports by the Reserve Bank of India saw gold prices correct by Rs 800 in a day. Further correction is not ruled out if the Narendra Modi government decides to remove all import restrictions.

Following the Reserve Bank easing the 20:80 gold import norms, the India Bullion & Jewellers Association expects gold prices to fall to Rs 23,000-24,000 per 10 grams by Diwali as it also expects the customs duty reduction in the forthcoming Budget.

Rupee appreciation: One of the reasons for gold prices to remain high in India despite weak international prices was a sharp depreciation of the Indian rupee, which fell to a low of Rs 68.70 per dollar last August. Gold and oil imports, FIIs outflows and appreciating US dollar had kept the Indian currency under pressure.

However, the rupee strengthened following measures by previous Finance Minister P Chidambaram and RBI Governor Raghuram Rajan. It bounced back to Rs 62 per dollar. The recent inflows in the Indian market on hopes of a stable government have strengthened the rupee further. It is suspected that the RBI is intervening to keep the rupee under 59 per dollar mark.

This is having negative impact on gold prices which have corrected sharply recently even as the international prices are stable. As the rupee moved close to Rs 59 per dollar, gold prices declined to sub-Rs 30,000 per 10 grams.

Better returns in equities: While gold has failed to give positive returns in the last one year, investors are slowly moving back to equities after a 5-year lull for better returns. In the last 5 months alone, the Indian markets have witnessed a sharp bull-run and hit fresh all-time high in June. At a time when gold prices are expected to depreciate further, analysts are gung-ho about Indian equities. Investors are liquidating gold positions and allocating more funds to equities.

Brokerages are outdoing each other with their projections of the Sensex and the Nifty targets. Karvy Stock Broking sees the Sensex hitting the levels of 1,00,000 in the next six years or by 2020.

“We see 2014 bringing a new bull cycle into existence. A strong export sector, revival in investment activity, continued recovery in the US and a stable Euro area are significant positives for the equity markets. With domestic macro-economic data also on the mend, we are aggressive buyers of the Indian equity,” said Varun Goel, Head PMS, Karvy.

Low demand for gold in international markets: Investors in global markets are turning away from gold as it has failed to give substantive returns. The yellow-metal is at near 4- month low and hedge funds have cut net longs by 8.3 per cent previous week. The gold ETF holdings are at lowest levels since December 2008.

The easing tension between Russia and Ukraine has also calmed investors. A pick-up in the US economy is likely to have a strong negative impact on gold, say analysts. Goldman Sachs has reiterated that gold prices will fall to $1,050 an ounce by the year-end.