Punters’ eternal favourite gold is currently under pressure after rallying from $ 1700 a troy ounce to $ 1900/oz in April and May on the back of weak US dollar and spurt in physical demand mainly in India and China.

It has now dropped to around $ 1750 a troy ounce, the lowest level since mid-April having suffered the biggest monthly loss since November 2016. This is evident from the fact that in early June, the precious metal reached $ 1915/oz. However, after the recent US Federal Reserve meeting, the metal has started to lose sheen with the dollar appreciating and long-dated US real yields rising.

The bourses reflect the mood of investors as speculative capital moves out. Investors seem to be turning less optimistic about the gold market outlook. No wonder, on the Comex, the non-commercial (speculative) net-long positions have declined to a two- year low as per latest data.

Demand subdued

The physical market is not supportive. The world’s second largest gold importer, India saw imports plummet to a mere 11 tons in May, no doubt after large imports in March and April. Increased price in the international market has discouraged larger imports. If anything, domestic gold price in the country is trading at a discount to international prices.

With the start of southwest monsoon, demand for physical gold will remain subdued seasonally in India as the rural population engages in agriculture related activities. The second wave of infections and its impact on economic activities is also likely to dampen demand in the months ahead.

China’s story is no different with imports in May lower than in previous months. Gold import into the Asian major is under a system of quotas issued by the Chinese central bank and it is estimated that 155 tons quota was granted for April and May.

A silver lining for the gold market is that outflows from ETFs have not accelerated. It is of course unclear if ETF investors are still convinced about the prospect of gold prices in the months ahead. Usually, activity in ETF takes a cue from gold prices with a time lag of a few weeks.

On current reckoning, gold is most likely to be under considerable pressure with rather limited upside potential but greater downside risk. The majority opinion in the Fed appears to be shifting towards the first of the rate hikes as early as next year. If inflation persists, the probability of rate hike will rise too.

Other precious metals – silver ($ 25.5/oz) and platinum ($ 1050/oz) – too have come under pressure in the company of the yellow metal, while palladium has managed to hold on to its level.

(The author is a policy commentator and commodity market specialist. Views are personal)

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