Gold: Prepare for a near-term slide

Gold investors in the domestic market may need to brace for a bear market. The new Government’s trade-supportive policies may improve domestic supplies of the yellow metal and trim down the existing price premiums. The rupee’s sharp gains against the greenback on Friday have made bullion futures contract fall through a key short-term support last week. MCX gold futures broke their range-bound movements and hit a low of ₹28,014. On Friday, the contract closed at ₹28,089, down 1.5 per cent. MCX silver future was down 1.3 per cent at ₹40,894.

Gold prices are likely to drop in the short term. One, FIIs (foreign institutional investors) might bring more money into India, now that the business-friendly BJP is all set to form the Government. This will strengthen the rupee. A strong rupee is negative for gold with the metal denominated in dollars. Market veterans say there could be inflow of $30-35 billion in the next one year from FIIs. Even the recent rally in the rupee is explained only by dollar inflows.

This year, FIIs have brought in $12.16 billion (inflows into debt and equity put together).

Next, restrictions on gold imports may go. Narendra Modi, in his address at a summit of bullion traders last year, criticised the Government dealing with CAD by curbing gold imports. Even if a cut in import duty doesn’t happen, the 80:20 restriction on imports, which has hurt gold jewellery manufacturers, may be modified. This will see imports revive, supply increase and local premiums on gold drop. Premium on gold bars in Mumbai hit a high of $110/ounce in January. But later that month, as Sonia Gandhi asked the Government to look at removing curbs on gold imports, the premium dropped. Currently, the premium is around $60-65/ounce.

Also, while supply is set to go up, it is not known if demand will catch up. The lacklustre performance of jewellery shops this year during Akshaya Tritiya raises doubts over strength in demand. Historically, Indian households display an increase in appetite for gold when prices fall. But for that to happen, prices have to come down sharply.

Now, won’t an increase in Indian demand buoy gold prices in the global market? Gold prices in the international market continue to be dictated by large investors and hedge funds. The demand for gold ETFs globally has been muted, thus keeping international prices in check. It may take time for Indian consumption demand to rise enough to influence international prices.

The outlook for gold prices in the international market is not too rosy either. Week after week, the numbers from the housing and job markets in the US are hinting at a strengthening economy. Last week, the number of people who filed for unemployment claims in the US fell to a seven-year low. Also, given that the equity markets in the country are on a rally, investors are jumping on to equities from gold. On May 13, the S&P 500 index hit an all-time high of 1,902. The one event that may keep a check on falling gold prices is the Russia-Ukraine tussle. If there is any increase in tensions between the two nations, gold may see safe haven demand.

The domestic market gold exchange traded funds have been quoting at a premium for many months now. The new gold import rules restrained these funds from creating fresh units leading to a short supply. Now, if gold imports resume, the premium on these units would vanish. Investors wanting to buy these funds can wait to allow the prices to converge close to their NAV. Traders in the gold/silver futures contract note that the price charts have turned very bearish for the short term in both the contracts. With the rupee likely to appreciate a little more in the coming weeks, short trades can make more money for you than the long ones.

Gold price in the international market may be range-bound for some time. For the long-term trend to turn negative, it has to drop below $1155.

The MCX gold (₹28,089) contract cut a key support at ₹28,050 last week.

It formed a dark candle on the chart on Friday by closing near the lows. In the coming day it looks likely to fall further to ₹27,247 and ₹26,062. Short-term upsides can take the contract to ₹28,200 and ₹28,965. The contract’s long-term support is at ₹25,925.

MCX silver (₹40,894) has broken the 61.8 per cent Fibonacci retracement level in the long-term chart. It is now moving towards its long-term support at ₹38,536. If this level is broken, there will be a steeper correction. On the upside, the first target is ₹41,317.

The long-term resistance levels for the contract are at ₹48,036 and ₹51,595.