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Will gold fall to $1200/oz? A matter of time, says IIFL

The News International Team

With festive season just around the corner, for most of us investing in gold is like a ritual, which has to be followed at any cost. But a wait to dig into the precious metal could prove to be more rewarding as global and local factors cast shadow on gold’s prospects to shine bright this year. Research firm IIFL foresees global gold price falling to USD 1,200/oz in a matter of time. It doesn’t find any persuasive factor to allocate funds to the yellow metal now.

Rate hike by US Fed

There are widespread expectations that strong US economic data could trigger a rate hike by the US Federal Reserve sooner than expected. Once rates are hiked, gold, a non-interest yielding asset may not remain an attractive option for investors.

“Positive US macroeconomic numbers have buoyed the greenback. US Q2 GDP is upwardly revised to 4.2 percent from the previous estimate of 4%. In addition, markets have started pricing in the fact that interest rate hike can occur probably early part of next year. Investors expect Fed to turn hawkish in the coming months. The inclination will be tilted towards the riskier assets,” adds the IIFL report.

Geopolitical woes out of the way

While it is good news from a global economy perspective that geopolitical tensions over the Ukraine crisis have eased; it is bad news for gold for sure. The yellow metal is generally seen as safe-haven buy during such crisis which takes a toll on other asset classes like equities and crude oil. But that appetite has now been curbed as well.

“Geopolitical issues have relegated to the backburner. Notwithstanding the deterioration in European growth scenario, investor fraternity is now paying more heed to the strong flow of US macroeconomic numbers,” it adds.

Also Read: Gold premiums to stay low in 2014 due to weak demand

Lacklustre demand

Global gold demand has remained subdued this year keeping prices under pressure. In the second quarter of this calendar year, demand for the yellow metal declined by 16 percent to 964 tonne, a WGC (World Gold Council) report released in August said. The overall gold demand during the second quarter of 2013 stood at 1,148 tonne.

World’s largest buyer of gold, China, also saw a slump in gold demand in the same period. The demand for bar and coin in Asia’s largest economy fell 64 percent in the second quarter, while jewellery demand was down 45 percent from last year’s record levels.

The scenario in close competitor India’s case was no different. Gold demand in Q2 declined by 39 percent to 204.1 tonne compared to 337.0 tonne for the corresponding quarter of 2013.

In the full year, the industry body estimates gold demand to fall further to 850-900 tonne and 900-1,000 tonne for India and China respectively.

Import duty, restrictions to pinch

Back home, the restriction put in place by the Reserve Bank of India (RBI) – the 80:20 scheme (introduced last year) and record high import duty could dent demand further. Despite the current-account deficit now under control and repeated pleas by Indian jewellers, curbs on importing gold remain and may stay until next year.

To tackle high trade deficit, last year gold import duty was raised to a record 10 percent and exporting a fifth of all bullion imports was made mandatory.

Trading strategy

IIFL recommends selling gold (COMEX Gold Dec future contract) with a target of Rs 1,200 keeping stop loss at Rs 1,330. IIFL sees this contract trading in 1,180-1,330 range. Similarly, those holding MCX Gold October future contract should sell it with a target of Rs 26,600 keeping a stop-loss at Rs 28,150.

(Posted by Harsha Jethmalani)

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