Rupee reduces the glitter

Lighten up on gold and limit it to the role of a diversifier in your portfolio



To the delight of gold merchants, India’s central bank softened its policy stance on gold imports last week. The move made the premium fizz on the metal disappear. International gold ended flat last week at $1,292. In the domestic market, spot prices dropped by over four per cent. MCX gold futures fell to break the support at ₹27,247 and hit a low of ₹27,100. It then rose marginally and closed at ₹27,349, down 2.6 per cent for the week.

Gold’s trouncing was also due to the stronger rupee which touched an 11-month high of 58.33 against the greenback.

In the global market, the yellow metal was dragged after the release of the FOMC minutes. The minutes showed that policy makers were convinced about the economic recovery. But they wanted to increase interest rates without much public resentment.

The dollar gained and hit a six-week high after the minutes. The US Dollar index ended the week at 80.39, up 0.4 per cent.

Investors shrugged aside the news of increase in jobless claims in the US. SPDR Gold Trust — the largest gold-backed exchange-traded fund in the world — saw its holding drop to 776.89 tonnes, from 781.98 tonnes. In the January-March period, the World Gold Council reported a 39 per cent fall in the demand for gold bars and coins.

Spot silver prices ended marginally higher at $19.45 an ounce. Platinum prices were up 0.5 per cent to $1,472.8/ounce on renewed problems in South African mines.

India gold ETFs - bearish

As indicated last week, the RBI has relaxed gold import norms. It has permitted star and premier trading houses to import gold. It also lifted the earlier ban on importing gold on consignment basis, giving relief to jewellers. As gold supplies are now expected to surge, the spot market premium on gold dropped immediately in Mumbai and Ahmedabad. The gold-backed exchange-traded funds also saw premiums drop and align with the NAVs. Gold BeES, the largest gold ETF, for instance, saw prices drop by 5.6 per cent to ₹2,550. Friday’s NAV was ₹2,522, just 1 per cent lower to the market price. Just a week back, the ETF was at a 6 per cent premium to the market price. Once the central bank does away with the 80:20 rule and allows free imports, the small premium that’s there now will also disappear.

We have been advising gold ETF investors to take advantage of the premium and book profits. Now, the outlook on gold prices has turned totally negative. The rupee is gaining strength with every week. Globally too gold prices are moving south. In the short term, gold prices may drop or be stable with little possibility of a rise (only a serious escalation of the Ukraine crisis can cause that). Investors wanting to book profits may move out of gold now and invest in equity funds. Keep gold only as a diversifier at around 10 per cent of the total investment portfolio.

Cues to track

In the international market, gold has been trading in a very narrow range for the last few weeks. Upsides are checked by the strengthening dollar and downsides by news flows from Ukraine. Prices may continue to move sideways for some more time.

The outcome of the Ukrainian elections will have to be watched. Experts feel that if Russia disrupts the presidential elections in Ukraine, it will result in the US and EU imposing more sanctions. With many companies in both these nations having trade ties with Russia, it is feared that such moves may wreck businesses and hinder economic recovery. Then, dollar may weaken and gold may see its price go up on haven demand. But, if the Ukraine issue cools off, then gold will have problems from the Fed winding up the stimulus and a strengthening dollar.

In the outlook published in the beginning of this year, we had said that 2014 could be a better year for gold than 2013 when prices dropped 30 per cent. Between January and March gold rallied 16 per cent to $1,392. Hereon, the gains may be limited. Unless the Ukraine crisis deepens further and US equity markets lose the fizz, strong gains may not be seen in gold.

Levels to watch

Internationally, gold prices are not giving a clue about where they are headed. The long-term trend will remain positive till prices are above $1,155, but until prices break above $1,320 decisively, gains will be limited.

MCX gold (₹27,349) first cut the resistance target at ₹28,200 and hit ₹28,299.

Then it drifted lower to break the support at ₹27,247 and hit ₹27,100. This week, however, the contract may weaken further to ₹26,900 and ₹26,440. On the upside, the targets are ₹27,800 and ₹28,000.

MCX silver at ₹40,797 continues to be weak with long-term support levels broken two weeks back. This week, levels to look for on the downside are ₹40,500 and ₹40,300. If the fall is swift the contract may well break ₹40,000 and go on to test ₹38,000 levels. Upside, if any, may see the contract move to ₹41,000 and ₹41,318.

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