Gold : How low can it go ?

by- Sugandha Sachdeva | AVP & Incharge- Metals, Energy & Currency Research at Religare Securities Limited 

With gold prices slipping to new five year lows, the sentiments have once again turned quite bearish. After respecting  the psychological level of Rs.25000/10gms at domestic bourses for a long time, prices have eventually breached the same, reflecting the lack of demand for the precious metal and unwinding of safe haven bets. In international markets too, the prices have plunged sharply and are trading below $1100 per ounce, significantly down from the all-time highs of $1920 per ounce. The universal safe haven asset has also failed to attract investors during the recent turmoil emerging out of Greece debt talks and the jitters in Chinese equity markets. So does that infer that prices may head further lower since the investors look in no hurry to take advantage of the lower prices? Well, the fundamentals are indicating something that’s not divergent from this thought !

The latest official gold reserves disclosed by China were way below what the market had anticipated, meanwhile the erratic drop in gold imports during the first quarter of this financial year from India points towards the lackluster demand. On one hand, this persistent slowdown in the demand from Asia (the biggest consumer of gold) is continuously putting pressure on the bullion prices, while on the other hand, the phase of declining prices has passed cascading ramifications on the supply side as well. The leading gold miners’ cost of production has come down significantly, having adapted to various cost cutting measures, which means they would still be in the business, even if the prices were to come lower any further.

Let’s also discuss the diminishing safe haven appeal of gold. In an imperfect world where majority of the nations in the Euro zone are leaving no stone unturned to handle Greece crisis and to save the Euro zone economy from collapsing, the risks of a global meltdown have been suppressed to a great extent. Another event of global stability that took the gold buyers off the hook was the historical deal between the US and Iran, that opened the doors for peaceful global environment. Both the instances strongly hampered the safe haven demand for gold and it’s not alluring investors even at current levels.

Last but most importantly, it’s the concerns about the anticipated interest rates hike in the US which are dragging down the prices. Latest testimony from the Fed chairperson shows that the Fed is all set to pull the trigger on interest rates, as early as September or December this year. Gold prices witnessed a dream bull run from year 2008 to 2011 internationally, when the US kept the rates at lows and kept pumping liquidity by their massive stimulus programs. Ever since the US has ended its quantitative easing program, gold prices have taken a beating and now as the interest rates cycle seems to reverse it can stumble further.

The technical setup also echoes the fundamental paradigm, where the prices have just slipped below an established support level of $1130 per ounce. This has led to a sudden sell-off, taking the metal towards $1072 per ounce mark. In the very short term, prices can take a small pullback from the said levels, but they look poised to head lower towards the targets of $1020-$1000/ounce in this leg of decline. At MCX also, the close below Rs.25700/10gms has put the bears in the front row, where in the immediate short run Rs.24400/10gms can offer some support, but over the intermediate term the targets of Rs.22600-22500/10gms look imminent. Investors are advised to wait for some more correction towards the said levels, before they can start investing in gold.

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