Gold prices on the downside, trader sentiment upwards. What about investors?

After a steep 4-day dip, gold prices continued to struggle today as well. Gold futures on MCX rose 0.3% to Rs 46,857/ 10 grams, whereas silver rose 0.6% to Rs 67,239/kg. In the last session, gold had dropped Rs 1000 or 2%/10 grams while silver had dropped Rs 1500 or 2.1%/kg. The precious yellow metal is now trading at 5% below its pre-Budget value.

On the other hand, global market prices too, remained low and below the psychological $1,800 level. Spot gold rose 0.2% at $1,795/ounce after a dip of 2% in the previous session. This fall in appeal was a result of a strengthened US dollar and an increasing US Treasury. The lows experienced by gold in the last few days have been the most in about seven months. In August 2020, gold was at a record high of Rs 56,200/10 grams.

In the last 25 years, 2020 was the least favorable year for gold. In India, demand had fallen to 446 tonnes as compared with the 2019 demand of 690.4 tonnes, as per a recent report by the WGC (World Gold Council). However, in the last quarter of 2020, demand had recovered back to 2019 levels again.

Why the fall?

There are a few reasons for this change. Firstly, the customs duty announcement in Budget 2021. Currently, gold has a 12.5% customs duty. FM Nirmala Sitharaman has now cut it down to 7.5%. Since India imports most of its gold and silver, this huge dip in customs duty instantly affected prices.

Another contributing factor has been the dollar gaining through the resurgence of the virus, a fiscal stimulus lower than expected, and a toned down risk-on sentiment in the international market, according to experts.

What is the impact?

Jewellers’ associations have largely invited the Budget announcement and opined that the industry had been demanding this for two long years and finally got its due. Although, the government has also proposed an agriculture infrastructure and development cess of 2.5% on silver and gold. Experts from the industry expect the price of 22-karat gold to go down by Rs 100-110/gram. Sellers are ecstatic about their business, which had fallen by at least 40-50% during the lockdown.

Jewellers also opined that this movement will discourage unaccounted selling of precious metals in the country. Plus, gold smuggling might also lose steam. Some jewellers had predicted an increase of at least 10% in business as soon as the fall began. When the lockdown restrictions had started easing, gold sales had begun increasing. Now, with the new impetus, footfall at gold stores across the country is set to increase in the next few months. This is, of course, provided the newly corrected prices remain stable.

What next?

There are quite a few analysts who are of the view that gold may lose some more as the overwhelming success of the vaccination drive and rising yields will lead money out of the non-yielding bullion. At the same time, low level buying plus wedding demand could provide some support. Plus, there has also been a better recovery in the dollar index and treasury yield, which is another factor that varies inversely with gold prices. Unless there is a softening of yield, a rise in prices isn’t very likely, say some experts.

Given the fundamentals, recovery in prices seems less likely, and could remain capped at Rs 49,200. Dealers have opined that the rise in demand for physical gold, ETFs (Exchange Traded Funds) buying, and exports, will provide some amount of support to the prices in the upcoming months. The demand for gold has greatly crossed pre-Covid level, but the tax cuts have not resulted in any quick demand in the physical market, as per some dealers.

Final Thoughts

While there are dealers and some market experts who are rooting for a further correction, there is another side of the story wherein analysts and experts are expecting the correction to be a short-term story. This group of experts has, in fact, been suggesting investors to positively go for gold funds right now and have faith in price rise in the next few months. It can safely be said that investors can use gold as a hedge if they have primary investments in equity and riskier instruments.

The next few weeks will be crucial for customers, investors, traders, sellers, analysts, and a lot of stakeholders in the yellow metal. Which camp of experts sees its predictions coming true would be an interesting game to watch for one and all.