Gold prices to inch up again: Study

Last Updated: Sat, Jul 13, 2013 14:24 hrs

New Delhi, July 13 (IBNS) Gold prices will inch up again steadily and will hover between Rs 26,500 and Rs 27,500 in the next few months before crossing Rs 28,000 per ten grams again around November-December on the back of end-user demand coming from the peak of the wedding season, an ASSOCHAM study on gold trends has indicated.

As the over-hyped concerns of tapering of the easy money in the near future have eased, the gold is already building demand even in the global markets, said ASSOCHAM President Rajkumar Dhoot.

A sharp correction in the prices from a high of around USD 1800 per troy ounce to about USD 1200 is also motivating major central banks in the world to build on their gold reserves. Even in the international markets, the end-user demand is seen at these levels and downside is not significant.

However, the domestic demand in India would now for the next few months would largely be driven by the end-users as some of the pure-play investors have burnt their fingers after betting excessively on the yellow metal and investing with bullish outlook even when it was selling in excess of Rs 33,000 per ten grams.

"Though the gold exchange-traded funds are a small fraction of the overall bullion trade, investors in the ETFs have lost significantly and are not expected to return for some time. However, once prices cross again the Rs 28,000 mark these investors would return as most of the them follow the trend and are not contrarian in nature," the study noted.

An earlier ASSOCHAM study had predicted that prices of gold could slide to Rs 25,000 per ten grams.

"Our assessment was done before the government had increased the customs duty and put other import restrictions through banking channels. Gold did breach the sub-26,000 mark and if the customs duty impact is factored in, the ASSOCHAM projections were on the dot," said Dhoot.

The latest version of the study takes into account the new factors that have come into play in the last 7-10 days.

"We tend to disagree with the general discourse among analysts who say that the gold has lost its flavour in favour of equities largely on the back of improvement in the US economy. Even if the assumption that the US economy is improving is correct, then the next consequence would be increase in inflation in the American economy. At that point of time, gold will again be seen as a safe haven against inflation," the study pointed out.

The ASSOCHAM study was based on inputs from several domestic and international analysts and those in the bullion trade and fund managers.

Continuing pressure on rupee will also influence the gold prices in the domestic market as the landed price would increase with currency depreciation.

Encouraged by low prices, India's gold imports had seen a huge rise to 162 tonnes in May giving anxious moments to the policy makers as it was exerting pressure on the country's current account deficit.

However, a persistent downward trend in prices and some punishing import restrictions kept investors away in June and the imports are estimated to be less than 50 tonnes. Imports in the coming months would remain subdued at least till the marriage season in November-December.

Additional pricing pressure on the upward side would also be helped by supply restrictions and it is expected that the quantity of recycled precious metal would increase for jewellery making.

"Hordes of gold coins and medallions collected by the middle class families would find way into the melting furnace of jewellers for meeting the jewellery needs for wedding," the study noted adding that it would not be easy for the Indian tradition of wearing, collecting and investing in gold to go away.

One of the main problems for the middle class investors is the lack of enough investment avenues.

"Inflation linked bonds are new products and have not been fully understood; fixed deposits do not save you against inflation; dislike among the retail investors for equity market is at a new high because there are instances where investors' wealth has been eroded by 90 per cent in the last 2-3 years.

"Debt market is beyond the comprehension of retail investors. All these factors combine together to make middle income group rush to the gold as a safe haven," said the study.

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