US dollar, demand weigh on gold prices

Defying conventional logic and widespread expectation, gold prices have been falling steadily. On July 2, the rates fell to a low of $1,240 a troy ounce, close to their mid-December low. In June, the metal lost more than 3 per cent in value at a time when geopolitical instability, worsening trade friction and looming event risks ought to have pushed it higher.

People are actually selling gold when they ought to be buying as per conventional wisdom. This raises doubts about the much-touted safe haven status of gold.

Gold’s downward spiral has caught many by surprise and they find it tough to reconcile with this situation. There are outflows in gold ETFs and less committed speculators are exiting their long positions, precipitating a price fall. If anything, net long positions have been switched to net short positions.

Significant factors

There are two significant factors weighing on gold prices. First is the US dollar. After the June rate hike, the currency has gained strength (quite unlike the weakness we saw soon after the March hike). Moreover, there are clear signals that there will be two more rate hikes in the second half of this year. This is propelling the dollar higher as the Fed’s monetary policy outlook signifies a strengthening US economy.

The second and crucial factor is demand, something this writer has been emphasising often. Demand for gold, especially in two of the world’s largest importers and consumers, is far from robust. As for China, import in May from Hong Kong and Switzerland was rather strong at about 96 tonnes; but total arrivals in the first five months of the current calendar year increased by less than 2 per cent.

The Indian situation does not look healthy either. Imports were down in May and cumulatively, in the first five months, arrivals were down by a staggering 30 per cent.

From June to September demand ebbs because of the agricultural season. The earliest revival of demand is at least three months away, that too subject to a normal southwest monsoon, satisfactory harvests and remunerative prices for growers.

‘Bottom fishing’

The benefit of the international price fall has been denied to the Indian consumers because of a rapidly depreciating rupee. There are now forecasts that the rupee may plunge to 70 to a dollar. In the event, the fall in dollar price will be neutralised by a weaker Indian rupee for domestic consumers.

At the same time, the current low prices may be seen as a buying opportunity; yet, in a falling market there is always the tendency to do what is called ‘bottom fishing.’

While the behaviour of gold has been anomalous in recent times, the metal could at some stage actually become a beneficiary of geopolitical and trade uncertainties.

If the crude oil market continues to say at elevated levels of say $75 a barrel for an extended period of time — say 3 to 6 months — gold’s role as an inflation hedge as well as safe haven status may resurface.

Silver — which more often than not rides on the coattails of gold — has also been dragged down. Recently the metal fell below $ 16/oz.

Going forward, silver looks vulnerable for a variety of reasons. The metal is tied to the base metals complex and the latter is likely to remain weak especially given China’s slowdown.

Also, demand from the electronics sector is expected to be tepid. In the event, speculative capital will move out of silver causing a further price fall in its price.

The writer is a policy commentator and commodities market specialist. Views are personal.

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