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Gold prices to fall further to $1,250/ounce in next 10 months

The steep sell-off in gold prices has been unfathomable, with the yellow metal breaching below $1,430 per ounce, the lowest level since February 2011

April 15, 2013 12:15 IST | India Infoline News Service
After giving remarkable returns for nearly a decade, gold has done the unthinkable. In the international market, gold closed $1,480 per ounce on Friday and declined to $1,475 per ounce on Saturday. Currently, the yellow metal is trading at $1,435 per ounce on Comex.

Gold fell below Rs. 28,180 per 10 gram level to close at Rs. 27,925 per 10 gram on Saturday in the Indian market. At present, gold is trading at around Rs. 27,219, down by 700 points on Multi Commodity Exchange of India (MCX).

“We have witnessed pronounced selling pressure in the entire commodity pack. Precious metals—such as gold and silver—have suffered the most, followed by energy and industrial metals. The steep sell-off in gold prices has been unfathomable, with the yellow metal breaching below $1,430 per ounce, the lowest level since February 2011,” Hitesh Jain, Commodity Analyst, IIFL (India Infoline), said.

(Also view: Gold Medium-Term Outlook)

Precious metals would remain under pressure, considering the predominantly bearish tone that has overwhelmed these metals as well as the industrial commodities. Surprisingly poor flow of the US macroeconomic number, manifested by declining retail sales and dwindling consumer sentiment also failed to provide support to gold prices, Mr Jain said further.

The US retail sales fell 0.4% in March compared to February, US Secretary of Commerce said. The decline is sales indicated that the consumer spending was considerably weaker in the March quarter. The decrease in sales sends concerns about the impact of higher payroll taxes, according to some US market analysts.

It seems that the precious metals markets have not been receptive to any macroeconomic developments. These metals opened lower today, regardless of sluggish GDP (gross domestic product) and industrial production numbers in China.
China’s economy grew by 7.7% in the first quarter of this year, prompting fears that the nation’s recovery will take longer than expected. China's economy grew by 7.9% during 2012, which was the weakest result since 1999.

The industrial production during March also failed to hit the mark. The China’s National Bureau of Statistics figures showed that output rose by 8.9%, while the market expected at least 10% growth.

The gold story seems to be over. The yellow metal is expected to fall further to $1,250 per ounce in the next 8 to 10 months. The bullish phase of the gold is over and we expect demand for gold coins as an investment will go down considerably. The fall in prices will create only genuine buying which will result in higher demand for jewellery by Indian customers, according to Ankit Chaudhary, Technical Analyst, Analyse India Market Solutions Pvt Ltd.

However, those that make jewellery, like Gitanjali Gems, Tanishq or Titan, may be impacted.

“Broad based liquidation and deterioration in the technical charts have aggravated the slide in gold prices. In addition, persistent outflow in SPDR Gold Shares—the largest gold ETF in the world—and reports that Cyprus may sell some 400 million euros worth of gold (10-12 tons) also weighed on the sentiment. Gold prices have breached the crucial support of $1,470 per ounce and the next support lies at $1,370-75 per ounce”, Mr Jain said further.

The holdings of the SPDR Gold Shares have fallen 10% from their peak levels. At 1,205 tonne, SPDR's gold holdings are at their lowest level since June 2011.
The growth of assets under gold ETFs in India slowed to 18% to Rs. 116.48 billion in FY12-13, compared with an average of more than 100% since inception in 2007, as investors sought refuge in debt instruments due to sagging gold prices.

The decline in gold prices may also impact gold loan companies like Mannapuram and Muthoot that provide credit based on gold collateral. Now, if people believe that the gold is worth less than what they’ve borrowed, they might just choose to default and let the finance companies take the hit.


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