Bullion Cues. Gold pulls back after ECB move

The European Central Bank’s new stimulus measure lifted gold prices from a four-month low last week. The yellow metal closed at $1,253 per troy ounce, up 0.2 per cent for the week. By cutting deposit rates to a negative 0.1 per cent, the ECB incentivised banks to lend money and checked the risk of the Euro Zone moving into deflation. Euro Zone inflation has been lingering below 1 per cent since October last year.

Silver ended 1 per cent higher at $19.02 per ounce; the week’s low was $18.66. Platinum closed at $1,452/ounce, up marginally.

The yellow metal’s gains in the week were checked by a strong dollar. The US dollar index hit a high of 81.02 in the week and settled at 80.41. On Friday, the US Labour Department reported that non-farm payrolls rose by 2,17,000 last month with the unemployment rate constant at 6.3 per cent. This strong pace of hiring reassured investors of the Fed continuing with its stimulus.

In the physical market, gold investor sentiment improved a bit. The SPDR Gold Trust — the world’s largest gold backed ETF — saw a slight pick-up in demand for the second week in a row. The fund reported holdings of 787.8 tonnes, up from 785.28 tonnes a week ago.

With domestic stock markets running up without pausing for breath, investors sitting on gold have to be cautious. If this run continues, the metal may lose its relative attractiveness. Gold’s comeback from lows last week could be even driven by short-covering. This week, there are no major economic releases.

However, given that the picture in Ukraine is not any better, with tensions continuing even after the election of the new President, short-term upside possibilities remain for gold. Gold traders will have to keep a tab on the dollar and the US equity market for cues. On Thursday, June 13, the weekly jobless claims data will be released. On Friday, the consumer sentiment data and Producer Price Index for May are expected.

One interesting sidelight here is that big gold miners in Canada have managed to bring down their ‘all-in sustaining costs’ (cost of extracting gold, plus costs of sustaining production at a mine and administration expenses) to $900-$1,000 per ounce from $1,200 last year, leaving open the possibility for more downside in gold prices from current levels.

Last year, gold prices held above $1,200 as experts believed that below that price, miners would cut back production as it turned unviable. Most miners had a cost of production at $1,200 per troy ounce at that time.

In India, gold prices continued to drop last week too on impact of the RBI’s action to relax earlier curbs on gold imports. Gold exchange-traded funds saw premium completely vanish. Gold BeES — Goldman Sach’s gold exchange traded fund in India — closed the week at ₹2,471, at its NAV of ₹2470.9. The average daily turnover in this ETF for the week was ₹778 lakh, down from the previous week’s ₹1,038 lakh.

MCX gold futures ended at ₹25,863, down close to 4 per cent. Silver did better. MCX silver futures recovered from a low of ₹39,465 and closed at ₹39,997, up one per cent.

The bullion traders association has been lobbying for a cut in import duty on gold for long.

The import duty on gold was raised to 10 per cent last year (from 2 per cent earlier) on burgeoning gold imports and the ballooning current account deficit. In the upcoming budget, the government may consider this. If that happens, gold prices in the domestic market may drop further.

Gold prices in the international market may look up this week to meet with resistance at $1,260 and $1,270. However, if bulls aren’t successful, prices may drop to $1,240. A major support rests at $1,225, so gold may not drop below this mark very easily.

MCX Gold futures contract may see more pain in the coming week with the medium-term trend turning negative.

The next levels are ₹25,000 and ₹24,830, the 2013 lows. The contract should recover from this point; else it will trigger further selling pressure and hit ₹23000. On the upside, the target will be ₹26,000 and ₹26,560. In MCX Silver there appears to be a strong support in the zone of ₹39,500 and 39,000.

In the coming week, if there is any negative news flow or the rupee emerges stronger vis-a-vis dollar, the contract may test ₹39,000. The upside target is ₹40,000 and ₹40,800.

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