May 29, 2012 05:18 PM IST | Source:

Gold may trade in USD 1,525-1,600 range for few weeks: IIFL

IIFL has come out with its report on Gold. According to the research firm, prices are expected to trade in the range of US$1,525 to US$1,600 for couple of weeks.

IIFL has come out with its report on Gold. According to the research firm, prices are expected to trade in the range of US$1,525 to US$1,600 for couple of weeks.

International gold prices remained under pressure this month, with the yellow metal losing 5% in US dollar terms on a mom basis. Volatility is simply the name of the game, with gold prices trading in the US$150 wild range during May. At the onset of this month, gold prices traded in the high US$1,600 range, however it was not able to sustain at those levels as US$1,700 levels proved too stubborn to be breached. At the midst of May, gold contravened the crucial support levels of US$1,600, with prices touching the 2012 lows of US$1,529 and now treading water in the range of US$1,550-1,590 levels. Stronger US dollar took a toll on the precious metals complex, with dollar index rising 5% on a mom basis. Euro hit abysmal lows as political uncertainty in Greece and France, coupled with deteriorating economic growth sent shivers down the spine of the market participants. In France, President Nicolas Sarkozy has lost 2011 Presidential elections to Socialist challenger Francois Hollande, who is against the stringent austerity measures and wants to renegotiate Europe’s fiscal and budget rules.

In Greece, political stalemate has haunted the financial markets, as all the three political parties have failed to form the government. The country will now hold new elections in June, with the upcoming balloting seen as a referendum on whether to remain in the Euro region. In this regard, market participants are concerned by the probability of a victory by Greek leftists, who are opposed to austerity measures. In US, lackluster macroeconomic numbers has aggravated the perception of economic stagnation in the world’s largest economy. The yellow metal is underpinned to a certain extent by this backdrop, as descending trend in United States has effectively raised expectations that the Federal Reserve may contemplate at quantitative monetary easing in the near future.

Meanwhile, market participants still remain uncertain regarding the policy measures in Europe to tackle with the prevalent debt crisis. In this regard, political leaders have failed to reach any substantial agreement on how to deal with Europe's sovereign-debt crisis during the latest G8 summit. Conflict of interests persists within the region, as France is propagating a Euro-bond proposal which would involve “mutualizing” European debt by replacing various local bonds with a pan-regional issue. However, Germany is vehemently opposing this proposal, arguing that there first needs to be better coordination in terms of fiscal policies.

On physical demand front, World Gold Council reported that global gold demand declined by 5% to 1097.6 tons during Q1 2012, as compared with the levels seen in Q1 2011. The decline is largely attributed to the weak consumption in India, in light of the high import taxes and high prices. Jewellery demand in India fell by 19% to 152 tons, from Q1 2011. Investment demand was down 46% from the previous year at 55.6 tons. Similarly, Bombay Bullion Association reported that India imported just 30-35 tons of gold in April, down from 90 tons in the year ago month. Conversely, Chinese gold demand expanded in Q1 2012, with consumer demand bucking the global trend by surging 10% to reach new quarterly high of 255.2 tons. Gold ETF also witnessed solid inflows during Jan-Mar’12 period, with demand for ETFs and similar products totaling 51.4 tons.

On sovereign front, central banks remained significant buyers of gold, as net purchases were registered at 80.8 tons, accounting around 7% of global gold demand. Russia and Kazakhstan persisted with their long term accumulation programme, substantially adding to their holdings. Mexico’s central bank made the largest single purchase of 16.8 tons. This numbers clearly point that emerging market economies have consistently preferred to diversify their foreign exchange reserves holdings.

On domestic price action, gold prices contrastingly have witnessed handsome gains as a substantially weaker Indian rupee has escalated the landing costs of the yellow metal. In this regard, INR has depreciated by 5% on YTD’12 and 23% on yoy basis. Effectively domestic spot prices have appreciated by 7% on YTD’12 & 29% on yoy basis.

In terms of price outlook, gold prices are expected to trade in the range of US$1,525 to US$1,600 for couple of weeks. Breakout in the either direction can only provide a fair sense of the near term price trajectory. Developments on European economic and political front will remain in focus, as further deterioration in euro could aggravate the selling pressure in the complete commodity complex.

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