Gold found support at its recent two-and-a-half-year low of $1,272 on aggressive bargain hunting by Chinese buyers, who accumulated the yellow metal as a safe hedge against other asset classes. Indian buyers, however, abstained from taking benefit of this opportunity as the drastic decline in the rupee restricted the quantum of price fall in the domestic market.
The bullion for spot delivery tumbled to $1,272 an ounce (oz) on Friday after Federal Reserve chairman Ben Bernanke hinted early withdrawal of it $85 billion monthly bond-buying programme, popularly known as quantitative easing (QE). The Fed's growing confidence in the US economy, supported by the favourable unemployment data, strengthened the US dollar against major global currencies. The event has also enhanced investors' potential of returns from the US treasury bond.
Gold declined 23 per cent this year in dollar terms, but the quantum of fall was capped at just 12.24 per cent in Indian markets due to the drastic decline in the rupee. The rupee fell sharply to hit the historical low level of 60 against the dollar, but recovered later to close the week at 59.27 on Friday. Overall, the Indian rupee depreciated 7.72 per cent this year.
"Bargain hunters largely from China rescued the bullion from further fall. They bought on every decline of gold amid expectations of its upward movement, going forward. Since the bullions are trading currently close to their respective cost of production, a further fall may force miners and smelters to cut their production," said Gnanasekar Thiagarajan, director, Commtrendz Research.
A decline to the level of $1,245 and then further to $1,200 cannot be ruled out before pulling back to $1,325 on production cut to be announced by miners and smelters, Thiagarajan added.
Silver is set to become more attractive in terms of returns in near term. Despite weak demand from the industrial segment due to the ongoing poor performance of global manufacturing sector, silver would find support as a substitute to other precious metals.
In fact, the proposed QE money is likely to be diverted only up to 50 per cent to the US treasury. The remaining 50 per cent, however, may be used in equity, commodity and other major sectors.
Back home, Indian buyers still feel the Reserve Bank of India (RBI) and the finance ministry would intervene for a correction in the rupee's fall, which may bring gold prices lower. Even at the current level of Rs 27,140 per 10 grams, gold is costlier by around Rs 1,500 from this year's lowest level of Rs 25,680 on April 17.
An Angel Broking report forecasts that gold prices would find support in the range of Rs 26,470 and Rs 26,430 next week. The resistance is now observed in the range of Rs 27,280 and Rs 27,330, marginally away from the current prevailing price.
Going forward, however, the government's measures to restrict gold import in India would reduce the metal's availability for domestic jewellers. Consequently, bullion dealers would ask for higher premium, which is currently prevailing at $1.5-2 an oz on the cost of imports, Jagawat added.
Following the global move, gold price in Mumbai's Zaveri Bazaar shot up marginally by 0.91 per cent or Rs 245 to settle at Rs 27,140 per 10 grams on Saturday as the yellow metal moved up by $11.35 to $1296.40 an oz in London the previous day. Similarly, silver, moved up 1.5 per cent or Rs 650 in the local market to close at Rs 43,000 a kg on Saturday.