Gold plunges over 2% on large scale pull out

November 5, 2014

Mumbai-India (Nov 5)  Gold price hit five-year low on Wednesday due to heavy pullout by wary investors to divert their funds into riskier assets following expectations of interest rate hike by the US Federal Reserves on the back of strong economic recovery.

Spot gold price in London hit $1,144 an oz, the level last seen on November 19, 2009. Gold recorded a decline of over 2% or $26 to trade at $1,140 an oz early Wednesday.

 In the rupee terms, gold slipped to Rs 25,750 per 10 grams, a decline of over 2% from the previous close.

Gold is currently passing through triple whammy - strengthening dollar, strong recovery in the US economy favouring thereby global equity markets and "sooner than expected" hike in US interest rates.

 Apart from that, the decision by the Japanese government to pump in fresh money into the system has also threatened gold's appeal as safe haven investment avenues.

"Gold hit the lower end of the cost of production which is widely estimated at $1150 an oz. At this level, we expect more miners will come forward for panic selling. But, perhaps investors are awaiting the outcome of the European Central Bank (ECB) meeting scheduled for Thursday. Widely expectations are that ECB will announce stimulus for the regions' economies to recover from steep downturn. Once stimulus is announced, inflation in the European region will go up. With surplus money in hand, gold will see some buying as a hedge against inflation to take gold at $1175 an oz," said Gnanasekar Thiagarajan, Director, Commtrendz Research.

Gold price has fallen 40% from its lifetime peak of $1900.23 an oz on September 5, 2011. The yellow metal slipped by 11% since October 1, 2014. Despite most global gold miners have reported either lower third quarter profits or slipped into losses, no one has announced a production cut so far. But, sustained level of below cost of production (i.e. below $1150 an oz) will prompt miners to declare production cut resulting into disruption of supply going forward.

Meanwhile, euro zone retail sales plunged by 1.3% in September as against a gain of 0.9% in August. United Kingdom Services Primary Manufacturing Index (PMI) fell to 56.2-level in October from 58.7-mark in September.

"If ECB holds on to stimulus, then gold price will see the next resistance of $1135 an oz and then $1100 an oz translating thereby, at Rs 24700 per 10 grams in the rupee term," said Thiagarajan.

Gold also gets downward pressure from declining holdings in SPDR Gold Trust, the world's largest gold-backed exchange traded fund. Gold holding under SPDR Gold Trust declined by 0.32% on Tuesday to 738.82 tonnes, its lowest since September 2008.

Spot gold prices are trading lower as strength in the dollar index kept investors away from the safe-haven asset. Also, holdings in SPDR Gold Trust, which slumped to a fresh six-year low on Tuesday is acting as a negative factor," said Naveen Mathur, Associate Director, Angel Broking.

With Japan's economic booster, the yen has fallen heavily to 111.05 against the dollar. The rupee closed flat at 61.40 but, the euro and sterling traded weak at 1.2564 and 1.5969 against the dollar respectively. On the MCX, gold was trading lower by 1.9% at Rs 25650 per 10gms.

Also, spot silver prices are trading negative today taking cues from weakness in gold and base metal prices. Adding to the weakness, strength in the dollar index is also acting as a negative factor for prices. On the MCX, silver prices plunged by 4.5% and touched a low of Rs 33730 a kg.

Weak sentiment also surrounded silver which recorded over 5% decline to trade at $15.29 an oz on Wednesday. The metal has hit below $15.21 an oz translating thereby into Rs 34,000 a kg in Indian markets.


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