Will Gold Prices Make A Reverse Swing?

This is the festival time in India and should investors consider this sell-off as an opportunity to buy precious metals on the cheap? Is it the right time to buy Gold? Why this decline may not benefit Indian consumers?

Take International Gold prices which fell under $1,200 an ounce this week for the first time in 2014. Looking at technical price charts, a nearby continuation chart shows the December 2013 low of $1,180, which is just above the June low of $1,179.40. How the physical market responds to the trip under $1,200. Chinese traders will return to the market next week after their Golden Week holiday ends, and they anticipate these lower prices will stimulate Chinese demand.

The Chinese will come back as buyers, as this is a new price level for them. They’ll be there to sop up the excess. But the question is, ‘will they be able to hold this level,’ and the answer is a clear no because the USD strength.

The Dollar index - or value of the US dollar against a basket of 10 international currencies - hit a 4-year high of over 85 last week and has consistently stayed above it. The biggest weight for gold is the strength of the U.S. dollar. The stock market, U.S. economy and the dollar are all doing quite well. In October, U.S. Federal Reserve will end of its bond-buying program. Higher interest rates will only bolster the U.S. dollar further. A stronger dollar means gold prices will fall. After all, a big reason for gold’s trouble in recent months has been a strengthening greenback.

It’s not just US Federal reserve fueling this trend. The European Central Bank is set to pursue an increasingly accommodative policy to fight deflation, while China has pursued its stimulus programme to put its economy back on track and Similarly, Japan has been maintaining loose policies to weaken its currency and drive up inflation. As other central banks weaken their currencies, the dollar gets an added boost there as well.

Rupee is hovering around 60-62 level. Due to rupee factor decline in international gold price may not benefit Indian consumers, as we forecast the rupee to average 61.4 against the dollar this year. This means we expect the price to be close to Rs 26,000 and an ideal level for those who had deferred purchases in the first half. This level could hold through the remainder of the year.