Despite starting 2021 on a strong note, gold had an unremarkable run during the year as it faced headwinds in the form of monetary policy normalisation, stronger US dollar and rebound in economic activities.

However, 2022 has given a new lease of life to the yellow metal. Its safe haven status has been boosted by geopolitical developments (Russia-Ukraine war). Raging inflation too has drawn attention to gold as a good inflation-hedge. Additionally, huge inflow of speculative capital and risk of reduced supply from Russia (about 9 percent) have combined to propel gold prices higher.

On a rally

The metal has witnessed a rally of approximately 10 percent and breached the psychological $2,000 a troy ounce mark recently. War has created a risk-off environment that’s positive for gold.

Until war tensions continue and inflation stays high, the yellow metal will remain well supported. So, in the short-term it should be no surprise if the metal trades in the $1,900 to $2,100 an ounce range.

However, war tensions will ease sooner rather than later. In the event, gold will face an imminent sharp correction. Simultaneously, tightening liquidity, firmer dollar and likely stock market rebound will all combine to make gold less attractive.

That’s the time, less-committed speculative capital will exit gold. First a big correction of $100-150 an ounce and then smaller corrections towards $ 1800/oz should surprise no one.

Under normal geopolitical situation, the base case is that gold will trade closer to $1,800/oz by June and then move gradually down to $1,750/oz by the last quarter of 2022.

Indian prices will generally reflect global trends. The domestic prices have the potential to decline by anything between ₹4,000 and ₹5,000 per 10 grams from the current levels. 

Joker in the pack

The Rupee could be a joker in the pack. The currency is likely to weaken towards 77-79 a dollar levels in the months ahead. So, the benefit of the fall in dollar price of gold may not be fully available to the Indian consumers. It is safe to assume Indian tax rates on gold will not change.

India is unlikely to see any marked expansion of gold jewellery demand. Rural incomes are still struggling to rise despite higher crop prices in some cases. Inflation continues to erode the purchasing power even as consumers continue to demonstrate a cautious approach.

If anything, at the current high prices, scrap sales will increase. It is common knowledge that in India, gold demand is price elastic and income elastic. At higher prices there will inevitably be demand destruction even though interested stakeholders will continue to be in the denial mode.

By nature, Indian investors are good at playing a rising market. They must learn to play a falling market and profit from it. But playing a falling market needs courage and a deep understanding of the market dynamics. Gold prices are set to decline from the current levels which by itself is an opportunity for market participants.

(Excerpts of the author’s speech at the recently concluded India International Bullion Summit 2022 in Mumbai. The author is a policy commentator and commodities market specialist. Views are personal)  

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