Prepare for a bearish first half

A stronger dollar, rising equity markets and slump in commodity prices can dent gold



Last year was an extremely difficult year for gold. Though it managed to rise up to $1,366/ounce initially on geopolitical tensions in Crimea in March, it couldn’t hold on to these gains. A stronger dollar, rising equity markets and the slump in commodity prices, which moderated inflation, took the sheen off gold.

Still, the metal closed the year only 1 per cent lower at $1,184/ounce, smashing predictions of $1,000/ounce and $800/ounce for the year.

The year 2015 may be an equally challenging one for the metal. One, the US Fed is determined to hike interest rates, which means a stronger dollar. Two, there are possibilities of the Euro Zone sinking into deflation and the ECB pumping more liquidity into the economy, which means a weaker euro and an even stronger dollar, negatives for gold. Three, with crude oil prices expected to remain depressed at least in the first quarter of the year, lower inflation expectations will dim the appeal of gold as an inflation hedge.

Gold may hover around $1,230/ounce levels this year. In the second half of the year, after the likely Fed rate hikes, gold may begin to take cues from its own fundamentals. There could be some support from central bank buying and any geopolitical tensions.

Cues to watch

The New Year has opened on a sober note for gold. The Euro Zone’s inflation for December will be published on Wednesday. Economists expect it to drop to a negative 0.1 per cent from 0.3 per cent in November. With the glut in the oil market persisting, deflation fears persist. Predictions for oil in 2015 range from $95 a barrel to a worst-case scenario of $43 a barrel. If the OPEC or the US oil producers cut output, oil prices may reverse. Analysts say that US shale oil producers may scale back output only if oil prices remain below $60 a barrel for three-to-six more months. This points to weak gold prices until mid-year. In the meanwhile, inflation and job market trends in the US will move gold prices.

And, if China hops on to the stimulus bandwagon, that will also boost sentiment for gold.

Watch out for geopolitical issues too. There is all probability of tensions cropping up again, in Ukraine, Russia or in West Asia — a positive for gold.

The metal’s fundamentals are strong — mine supply is stagnant and consumption demand is rising with growing middle class population in India and China.

Also, many large and small mines are working at a cost of production around $1,100-1,200/ounce. If prices stay at current levels, soon these mines may shut down and tighten market supplies.

Price outlook

It is really a tough task to predict gold prices this year with many variables in the equation — from central bank stimulus, the Fed rate hike, volatile oil prices and the dollar.

But based purely on price trends in the charts, drawing a conclusion is possible. There is a descending triangle pattern in the price chart with the first peak in August 2013 at around $1,434 levels and successive peaks at $1,380 and $1,345 with the trough at $1,200. Once this pattern terminates, it is possible that price will correct steeply. In the coming weeks, if gold continues to trade below $1,200 mark, there are chances that at one point it will break $1,180-1,170 levels and plunge further.

However, if it moves decisively above $1,200 and cuts past $1,250 levels, the outlook turns positive.

For Indian gold investors

Gold should be a part of your portfolio as a diversifier from risks of equity investment. So, if you don’t hold gold, buy now. You can invest up to 10 per cent of your investible surplus in gold. In the near term, though gold internationally may trend lower, in Indian rupees, the fall may be limited given that the rupee is weak.

Rupee has dropped from 58.33 in May against the dollar to 63.3 now. The outlook for rupee remains sombre with the Fed’s likely rate hikes to pressure EM currencies.

MCX gold futures may remain range bound. For traders, the returns will vary based on how strong or weak the rupee is against the dollar. Broadly, the contract will remain in the band of ₹25,500-28,500.

There is a strong resistance at ₹27,500 levels. Prices need to move above this level, to rise further up. On the downside, if ₹25,200 is breached, it can fall even steeper to ₹24,000 levels.

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