The customary gold buying on the occasion of Dhanteras might see a limited buying this year owing to limited supply, though market experts believe that the yellow metal is still a lucrative investment option for long term.
In an interview with Ajeet Kumar of Zeebiz.com, Vandana Bharti, AVP, Commodity fundamental research, SMC COMTRADE LTD, shares her views on whether to buy gold or not, and how gold prices will pan out this year.
What range do you expect gold to trade on Dhanteras?
There is a tradition to buy bullions on the auspicious occasion of Dhanteras in India. We generally see a surge in physical demand during this time. This year we can expect the same trend but due to supply crunch in physical market, buying is expected to be limited. Even premium in domestic market is expected to rise, which is near USD 120 at present. This may limit the physical buying and due to which we can see a restricted upside in gold prices during Dhanteras. Though there is some weakness in international market but we may see an upside of around Rs 31,000 in gold in MCX due to supply squeeze.
We are currently in a volatile precious metals market. Is current volatility sustainable?
Yes, we are facing a very volatile phase in precious metals. After a bull run of 12 years it is going through a downside move in 2013. This volatility may sustain in 2014 as economic stability in various major economies is still not confirmed, and this may give some wild swings to gold prices.
What range do you expect gold to trade by the end of 2013?
At MCX we can expect the gold to trade in a wide range of Rs 28,000 - Rs 33,000 and in COMEX it will be within a range of USD 1280 - USD 1450 by the year end. The bias or the trend should be of an upside on account of seasonal demand, especially from Asian countries.
Will supply crunch add more premium to gold in domestic market?
With a series of government actions to discourage the imports and physical demand of gold, spot market is facing supply crunch in gold and it is trading at a high premium. To contain gold demand, the government has raised import duty to 10 percent and stipulated that 20 percent of imports should be used for exports. This Dhanteras and Diwali, we can expect further rise in premium with increasing demand. If some additional supply occurs during festive time then it may limit the upside of premium. State-run STC will import six tonnes of gold to boost supply of the precious metal in the domestic market during the festival season.
In your view, what are the three biggest downside risks to gold right now?
The biggest risk to gold is that investors lose interest in the middle of better return in riskier assets. Improved economic performances are indicating that sooner or later the US Fed will go for some tapering which may steal the shine of gold further. Decline in investment demand amid peace between Western countries and some Middle East countries can lessen the appeal of safe haven buying.
In your view, what are the three biggest upside triggers to gold right now?
If geopolitical tensions resurface then safe haven buying may return in bullion counter. Next year, if Fed continues bond buying program then gold may regain its strength further. Euro zone is still a matter of concern and economic performance of euro zone may be a factor to decide the fate of gold. Apart from these three factors, I would like to advice investors to pay attention on currency movements which really impact the prices of gold in a big way.
What is your outlook for gold prices in the near to medium term?
Gold prices may remain on highly volatile note in near to medium term. Movement of greenback, central banks’ buying and ETF demand will give direction to its prices. At the recent meeting, the Federal Reserve extended its support for a soft US economy as it announced plans to keep buying USD 85 billion in bonds per month. Though a prolonged period of easy money have supported gold but physical demand in India has taken a hit due to the higher prices. Demand in Asia has been subdued for a while but pick-up in demand from China has supported the prices. Gold can trade in range of Rs 28000-33000 in MCX and USD 1260- USD 1450 in COMEX.
Do you believe gold is an effective way to preserve capital?
Yes, gold is an effective way to preserve capital as it is considered hedge against inflation and uncertain times. Gold should be one of the key investment options where every investor should park some portion of their funds as yellow metal is also known for its safe haven appeal.
Now, what`s the best way to go about this? Do you think people should buy physical gold/ gold savings fund/ ETFs/ futures?
There are various modes of investments in order to invest in yellow metal. The first avenue is buying physical gold in form of gold coins and jewellery, but a risk from theft is attached to it. Another mode is investing in futures markets which are very speculative and highly leveraged. There is a client’s margin which may get wiped off in single day of adverse price movement. However, the best mode of investment in gold is in its ETF or gold saving fund whereby units of gold can be purchased in demat form.
Is the yellow metal still a long-term investment?
Yellow metal is still a long term player as this market has seen a number of positive structural changes since 1999. These include the launch of gold-backed ETFs, the liberalization of the Chinese gold market, the Central Bank Gold Agreement, developments in the use of gold as collateral, an increase in emerging markets disposable income, and the resurgence of investment demand as a by-product of the 2008-09 financial crises and its aftermath. The combined factors indicate that gold is still a long term investment option.
Are conditions underpinning the gold Bull Run largely in place?
The conditions underpinning gold Bull Run are still intact as easy monetary policies from various key central banks after the 2008 crises coupled with massive surge in demand from China and global inflation concerns are supportive for yellow metal.
Is a deeper retracement or a rebound ahead for yellow metal?
Gold in international markets has already seen more than 50 percent retracement from 2008 low of USD 680 to lifetime high of above USD 1900 to near USD 1300 levels. After making low of nearly USD 1180 in June this year prices have shown some sort of bounce back. In the current scenario, prices have been consolidating since last four months, and the pattern is likely to remain in medium term.
Has outlook for gold been dashed by its recent weakness?
The long-term secular Bull Run in gold has not ended. This recent weakness is just a correction within the larger Bull Run. The yellow metal will move in a range for couple of quarters before taking another leap forward.