It is unclear what will prompt gold to decisively break above the psychological $1,300 a troy ounce because many of the props are already in place: geopolitical tensions are rising; trade talks between USA and China are floundering; major economies have either slowed or are slowing; central bank purchases continue; and there is still chance that the US Federal Reserve will cut interest rate possibly in the second half of the year.
Despite several positive factors in its favour, the yellow metal has failed to benefit and continues to languish at around $1,280/oz. This has flummoxed many investors, especially die hard gold bulls. While inflows into gold ETFs were a key driver of gold demand in the last quarter (more pronounced in January), the last several days have seen steady outflows from gold ETFs. So, questions are now being raised about gold’s safe haven status.
The answer lies in the demand side, so often overlooked by many. India and China are two of the world’s largest markets for the yellow metal.
Without doubt, Indian demand was strong in the first quarter of the calendar year with imports up 20 per cent year on year. Data suggest that India imported $3.3 billion worth gold in March which equates to roughly 76-77 tonnes representing a one-third increase year on year. A fall in rupee price triggered by a stronger currency surely encouraged buying.
While Q1 demand was robust, the trend is unlikely to last beyond April. The next four months – June to September - are seasonally low demand months as the country’s rural areas engage in farm related activities. It is a low season for the physical market. What will happen beyond September is anybody’s guess as the country risks below-normal rainfall.
At the same time, China’s first quarter imports were down by 50 per cent. Chinese demand for gold has been weak in recent months. A cut in VAT from April 1 is likely to potentially support demand. But sluggish Chinese economy will result in demand compression. In other words, looking ahead, the demand side is not looking strong for China and India both.
Interestingly, as of April 30, according to CFTC data, speculative financial investors completely reduced their net short positions in gold. This suggests that investors are still bullish about the yellow metal and expect a price rise sooner or later.
So, what can trigger a price spurt? Risk aversion is expected to return later this year. One, President Trump’s higher import tariffs can hurt the US economy which in turn may force the Fed to lower interest rates. ETF buying will also provide a significant support to gold prices.
As it happens often, gold has been dragging other precious metals down in recent days. The gold /silver ratio has risen to 87, its highest level in over 25 years, according to experts. Speculative financial investors remain pessimistic about silver. The price differential between gold and platinum has widened again to $420/oz. Palladium has been rather volatile given its industrial application; but overall the metal is expected to decline from the current levels.
Meanwhile, with a new government likely to assume office in less than three weeks, lobbying for a reduction in customs duty on gold import has started in the country. There is of course little merit in this demand. The new government will need revenue from various different sources; and as a demerit commodity, gold is most unlikely to be favoured with a duty cut.
The writer is a policy commentator and commodities market specialist. Views are personal