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May 13, 2013, 09.58 AM IST | Source: Moneycontrol.com

All set to buy gold today? Not a good idea, say experts

For most of us Akshaya Tritiya would be an ideal occasion to buy gold, but experts predict further correction in gold prices going ahead. From strictly a financial point of view, experts feel it doesn't make much sense to buy gold at current levels.

Harsha Jethmalani
moneycontrol.com

Indians are usually looking for an excuse to satisfy their hunger for the yellow metal and the upcoming auspicious occasion of Akshaya Tritiya is likely to provide just that. Akshaya Tritiya is the second biggest festival after Dhanteras for buying gold. With gold prices showing signs of easing after a long time, buying gold on Akshaya Tritiya seems just natural. Right? Think again.

Experts who track the movement of the precious metal believe the recent crash seen in gold price may not be a temporary blip , and that it could remain subdued for a while.

Praveen Singh, senior analyst - commodities at Sharekhan says barring traditional significance, it probably doesn't make much sense to buy gold at current levels.

“The prices are already up 10% from the bottom and the US job report for April is encouraging, so from a short term perspective buying is not advised. Retail investors should wait for lower levels,” he told moneycontrol.com.

Echoing Singh’s view, Kishore Narne (Associate Director Head - Commodity & Currency), Motilal Oswal Commodities says though the size of selloff in gold was rare, one cannot call it blip as investment money or exchange-traded products (ETP) flows continue to move out of gold after the crash.

Gold holdings in ETP plunged more than 7 percent, a drop to 174 metric tons last month alone. Investors pulled out more than USD 10 billion from gold funds in the first quarter, which is the most in more than a decade. Even though the drop in prices was sudden, the rebound in prices in no way can be interpreted as a trend reversal, he elaborated.

According to Narne, seasonality does play a role in determining gold price movement, and gold prices do tend to soften after the wedding season in May and before the festive season that begins after August, but there is no technical or fundamental reason to buy gold on a particular day.

“Investors willing to play on seasonality can look to buy after such festivals. But gold buying on occasions like Akshay Tritiya has more to do with religious reasons than the timing of gold markets, and most of these purchases are long term in nature. We feel they would certainly beat the long term inflation on returns,” he said.

Oh my gold!!!

It is a well known fact that India is the largest consumer of gold. Despite steps taken by the government to discourage people from hoarding the yellow metal, the demand continues to remain high.

A recent Religare report said that central banks own about 30,000 tonne of gold of which Reserve Bank of India has about 560 tonne currently valued at about US$ 26 billion and representing 8% of our forex reserves. The US owns more than 8,000 tonne of gold.

According to Singh, market sentiment governing gold prices tend to react to various macro economic data from the US, so fall in prices is likely. But given the price conscious mentality of buyers, they don't entirely agree with the notions that there is a possibility of a severe correction in prices.

“Strong physical buying led to metal shortage in Dubai,Hong Kong. There were long queues in Japan, London, Turkey, etc. But people are price conscious and they have just witnessed a sharp fall in prices, going by their psychology, they would go slow on physical buying as prices recover,” he explained.

He expects prices to remain subdued for some time; however he says one cannot judge that the metal is in a long bearish phase yet.

On the other hand, Narne feels long term bearish phase is in place. However, the only risk to this outlook is an outbreak of a major crisis to Lehman or a sovereign default by a major Euro zone nation, which is unlikely.

Gold price below 20k again? Conditions apply!

Gold price hit the Rs 20,000 mark in February 2011, since then it has just been heading higher due to various local and global factors. A steep fall to Rs 20,000 would mean nearly 30% decline from the peak price in Indian rupee terms.

Despite the insatiable appetite for the precious metal in India, one cannot rule out the possibility of prices falling below 20,000/10 gms again, Singh said.

However, for that to happen, few factors have to fall in place. “We need to see a string of extremely good economic indicators out of the US and other major economies for at least two quarters continuously, though US numbers are crucial. Secondly, the price of metal needs to drops to $1150 and the rupee should rally to 52 level against the Dollar,” he explained.

Since US indicators are mostly soft and the data elsewhere is also not so encouraging, the chances of such a steep fall seem very dim in near-term.

Narne said, the weakness in rupee has lead to higher price in the domestic market. Unless the Indian currency appreciates significantly, gold may not see 20,000 again.

However given the trend in international prices, Rs.22000-24000 over a longer term looks possible to him.

How bright is gold’s future?

In the worst reasonable case, this year, the downside for gold price is capped at $1150 (Rs 20,000-Rs 21,500). But, before that one should watch out for crucial levels of $1330 and $1250. On the other hand, $1525 (previous solid support) and $1650 are key levels on the upside.

Narne expects gold price to further correct as the global macro environment improves. It could fall towards $1100-$1180 level in the international market and around Rs 22000-24000 in the domestic market depending on the levels of rupee, he said.

harsha.jethmalani@network18online.com

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