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Gold Investors Face Uncertainty On Events In Ukraine, India

Published 03/05/2014, 12:44 AM
Updated 07/09/2023, 06:31 AM

Gold investors have been setting their sights on $1,400 an ounce, a price not reached since September, as the worst standoff between the West and Russia since the end of the Cold War increases demand for the metal as a haven. Gold prices today, fell from the highest price in more than four months. Gold and silver futures rose as much as 2.5% yesterday as Ukraine said Russia ordered Ukrainian warships in Crimea to surrender. Gold and silver prices along with bonds retreated, while socks rose, with a global index rebounding today from the biggest drop in a month, and the ruble rallied as Russia stepped back from escalating the crisis in Ukraine. Russian President Vladimir Putin said today he’s not considering taking control of Crimea and would send in troops to Ukraine only in an extreme case. Stocks gained earlier after Interfax reported Putin ordered some troops back to bases after military exercises ended while forces remained in Ukraine’s Crimea region. Comex gold prices retreated to $1,332 an ounce after surging as much as 2.1% yesterday to $1,355, the highest price since Oct. 30, while Comex silver for May delivery fell over 1.9% to $21.075 an ounce. Holdings in gold-backed exchange-traded products rose 6.9 metric tons to 1,746 tons in February, the first monthly gain since December 2012. Last year, Gold ETP assets dropped 33%, wiping $73.4 billion from the value of the funds.

MCX Gold futures for April delivery on India’s Multi-Commodity Exchange, slumped to Rs. 30,071 from the day’s high of Rs. 30,650, while the MCX silver May futures crashed to Rs. 46,912 from the day’s high of Rs. 47,977 and also from yesterday’s high of Rs. 48,310. While investors are once again flocking to the precious metals, leaving prices poised for the biggest quarterly gain since 2007, I expect gold and silver prices to remain highly uncertain and volatile in the Indian markets, based on a line up of major events in India. Gold prices have gained 11% this year till date, rebounding from the biggest annual decline since 1981, as signs of slowing economic growth increased demand. We believe that much of the risk premium has already been priced into gold prices in the past few sessions. Gold could come under a heavy bout of profit-taking pressure in case Ukrainian worries ease and forthcoming U.S. data this week top market estimates.

Gold Analysts seem divided on future views

Analysts are split on the outlook for prices. Goldman Sachs Group Inc. last month reiterated its forecast for the metal to reach $1,050 by the end of the year. Westpac Banking Corp. sees bullion dropping to $1,011 in December. UBS AG said Feb. 19 that the commodity has “started to shed its stigma” and increased its 2014 forecast to $1,300 from $1,200. But at the same time, Hedge funds and other money managers boosted their gold net-long position, or bullish bets, by 25% to 113,911 contracts in the week to Feb. 25, the highest since December 2012, U.S. Commodity Futures Trading Commission data show. Fed Chair Janet Yellen said last week that the US central bank is “open to reconsidering” the pace of cutbacks in asset purchases should the economy weaken. Policy makers next meet March 18-19.

Indian Elections results to influence gold and silver prices

Outcome of general election due in April-May with prospects of a stable new government would influence gold prices apart from equity markets, a study said. ”Gold prices in India may increase beyond Rs 32,000 per 10 grams in the coming few months in case the voters throw up a highly fractured mandate leading to an unstable government at the center,” industry body Assocham said in a study. On the other hand, in case India gets a decisive government after elections even within a coalition framework, the investor bias will return towards equity and real estate and the gold may lose in the bargain of portfolio shuffling.

In its study ‘Golden Connect of Indian Elections’, the industry body said at the moment, three important factors are driving the global gold market. ”Concerns over Chinese economy, uncertainty over the pace of the US economic recovery and the anxiety around the Indian general election. India and China are competing with each other for retaining the slot of being the number one consumer of the yellow metal.

“The demand in these two markets is going to increase should the two economies witness political or economic uncertainties,” says the study. It said the trend of the investors is shifting again to gold as a safe haven asset as prices have risen over 10% so far this year.

“In the case of a stable government, the Sensex will zoom and the overall investor confidence about economic activities such as real estate, finance, consumer goods, two-wheelers and passenger cars will pick up immediately.”

This will see money moving away from gold which can then see further easing trend. However, reverse trend will be seen should there is a highly fractured mandate, it said. ”While the global factors will certainly weigh on gold prices, the Indian market as a consumer of the yellow metal and for the equities would be surely affected by the unfolding developments,” Assocham secretary general D S Rawat said. He said the yellow metal may still see increase in prices even if there is a stable government in India, if situation in Chinese economy worsens and the US economy does not pick up. In that case too, global money will find haven in yellow metal, but for India alternate avenues for investment other than the gold will be clear, he added.

Global spot gold prices are hovering between $1,330- 1,345 per ounce, drop of about 29% in 2013. But, the trend may again look positive, it said.

“…although there is an opinion which indicates a further drop in the yellow metal right to $1,000 an ounce.”

“Whatever is the case, India would matter since even despite severe restrictions and imposition of customs duty of 10%, the imports would exceed 500 tonne this year. After a fall in the previous few months, reports indicate that gold imports rose again to 38 tonne in January,” Assocham said.

Indian Jewelers Plan Shutdown to Demand Easier Gold Import Rules

Gold jewelers in India, the world’s second-biggest consumer, are planning a nationwide shutdown next week to demand easing of curbs on precious metal imports.

Bullion dealers and jewelers will shut shops on March 10 to protest restrictions on imports, Kumar Jain, a spokesman for the Bombay Bullion Association, said by phone. Jewelers want the import tax cut to 2 percent from 10 percent, relaxation in re-export rules and easier credit norms, he said. The association represents about 1,000 jewelers and traders.

India raised the tax on gold imports three times last year and linked shipments to re-exports to rein in a record current-account deficit and a slump in the rupee. The restrictions reduced overseas purchase and created a shortage, fueling domestic premiums to a record $160 an ounce over the London cash price in December. The South Asian country buys all its gold from overseas and made up for 25 percent of global demand in 2013, according to the World Gold Council.

The Commerce Ministry is in discussions with the Finance Ministry and the Reserve Bank of India about changing import rules, Minister Anand Sharma said in Mumbai today. Finance Minister Palaniappan Chidambaram said on Jan. 27 the curbs will be reviewed by the end of March only if Asia’s third-largest economy controls the current-account deficit.

The deficit, the broadest measure of trade, tracking goods, services and investment income, will narrow to $45 billion in the year ending March from a record $88 billion in 2012-2013, Chidambaram said Feb. 17. The shortfall was $5.2 billion in July through September, compared with $21.8 billion for the prior quarter, the RBI said Dec. 3.

Overseas purchases may total 550 metric tons this fiscal year and may remain below 600 tons in 2014-2015 if the curbs continued, according to Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation. Consumption rose 13 percent to 974.8 tons last year, while official imports fell 4.1 percent to 825 tons, according to the council.

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