When will the selling in gold stop?
Mumbai-India (May 31) Gold prices fell below $1,200 levels again last week. On every one of the five occasions when gold fell below the $1,200 mark since October last year, it has bounced back. There are two reasons underlying this.
One, large gold miners of the world have not expanded their capacities since 2012, with the result that global mine production is expected to decline from the second half of 2015.
Two, major central banks, including the European Central Bank, the Bank of England, the People’s Bank of China and the Bank of Japan, are now harping on monetary easing, a plus for gold. This suggests that gold should consolidate around the current levels and start to move up. But wait, as there are risks to this presumption.
The resurgence in dollar, the rise in bond yields and a stronger global equities market are reducing gold’s appeal as an investment. This keeps the door open to volatility in gold prices in the near term. If the US economy continues to strengthen and inflation also heads north, there could be some renewed selling pressure on gold.
Global spot gold prices declined by 1 per cent last week to close at $1,190.58/ounce after hitting a low of $1,180.81/ounce on Thursday. The US jobs report showed unemployment claims for the week ending May 23 increasing to a five-week high of 2,82,000. Platinum ended at $1,112.37/ounce, down 2.96 per cent. Silver closed at $16.75/ounce, down 2 per cent.
On Friday, the US GDP report showed that the economy contracted by 0.7 per cent in the first quarter — sharply lower from the first estimate of a 0.2 per cent expansion.
The data, however, didn’t create any ripples in the bullion market, as the dollar didn’t react much to the report. The US dollar index closed at 96.907, up marginally from the previous week.
The US SPDR Gold Trust, the largest gold-backed exchange traded fund, saw a quiet week after an extended period of heavy selling. It reported gold assets of 715.86 tonnes.
Weak Asian demand
Gold prices in Hong Kong have moved into a discount to international prices. Reports say that the premium dropped to 50 cents from $1 an ounce. In India too, demand for gold in the spot market has not been great. Prices were at a discount of $4/ounce to global levels, higher than $2/ounce beginning of May. MCX gold futures contract closed at ₹26,860, down 0.8 per cent. MCX silver futures contract dropped 1.5 per cent to ₹38,349. Bullion contracts didn’t see a sharp loss unlike the international market, helped to an extent by the rupee.
MCX Gold has an immediate support at ₹26,800. If the contract witnesses pressure this week again, it may drop further to hit ₹26,000. But if it witnesses a reversal, it may move up, targeting ₹27,200.
MCX Silver looks quite bearish on the charts. The fall last week has opened up downside targets of ₹37,950 and ₹37,500.
New gold forward contract
NCDEX has launched a new online platform for a forward trade in gold that will help physical market participants in gold, such as refiners and jewellers benefit from a transparent price discovery. The exchange will accept not only LBMA-approved gold bars but also those supplied by the four local refiners, including MMTC-PAMP and Edelweiss Gold Refinery.
Currently, there are only two contracts — one of 100 gram and the other 1 kg. Delivery will happen through six delivery centres — Ahmedabad, Mumbai, Delhi, Kochi, Hyderabad and Chennai. The exchange intends to launch gold forward contracts in smaller sizes of five, 10 and 15 grams in future. Retail investors in gold may also then have a way to buy gold in small quantities through the online platform.
Gold prices in India have so far been discovered on an informal basis. The major bullion dealers in Mumbai quote a price based on their purchases, with a premium or discount element.
But now, as each trader will get to participate in bid-ask quotes on the NCDEX’s forward platform, it will be open to all and price discovery will be transparent. The other advantage here is that the exchange offers a compensation guarantee in case of default by either of the parties to a trade.