Gold's fall not over yet; sell now recommend experts

Given the recent correction seen in gold prices, Naveen Mathur of Angel Broking and David Lennox of Fat Prophets maintain a bearish stance on the yellow metal.

In an interview to CNBC-TV18, Lennox said, "People who are holding gold, especially in exchange traded funds (ETF), are now looking at other broader markets, especially equity markets." Agreeing with Lennox's outlook, Mathur added that he expects COMEX gold price to consolidate around USD 1350-1375 per ounce. For MCX gold futures, one can sell gold with a stop loss of Rs 26,330 per 10 grams, he added. Gold has seen its worst decline in a month after investors cut their exposure to bullion. Gold exchange-traded funds (ETFs) fell to their lowest level in four years. "When one doesn't have any festivals or marriage season coming out, that, alongwith the international markets cueing down towards the negative side creates pressure on the downward side of the trajectory for the gold prices," Mathur elaborated. Below is the edited transcript of the interview. Q: What does gold look like in terms of valuations at this point, does it look mouthwatering or do you think that it will be a possible sell now? Lennox: At this stage, we would suggest that gold is probably starting to again look quite fair in terms of valuations. When one has a look at what we are seeing happening in the demand side of the equation, we do think that we are seeing people who are holding gold especially in the exchange traded funds (ETF) funds, they are looking at other broader markets, especially the equity markets. We think it has been a rotation ahead of those ETF funds into the equity markets. The gold that is coming out of those particular ETFs has got nowhere else to go unfortunately but just trade on to the market. Q: The big question is that will we revisit the April lows and if that happens, will physical demand again come back because especially from countries like China and India because the big talking point was how India’s gold imports increased 130 percent in the month of April. Do you see a scenario like that panning out again? Lennox: We have certainly been watching the Indian jewellery fabrication market for some time now and those numbers have no doubt been very poor. We have seen first significant improvement in gold imports going into the jewellery fabrication market in April and March quarter. We would be looking for that to hopefully continue through for the rest of this year and provide what we would think is a very strong and stable support for a potential rise in the gold price towards the end of the year. Q: What have you made in terms of the downside that we have seen in gold and what would you recommend, are these valuations that we will possibly never see again hence accumulate or do you think that it is a possible sell? Mathur: The market looks to be bearish. There are a number of fundamental factors apart from the ETF and the buying of India which happened in April. We do not see much of the positive buying coming in even if the prices are down to around Rs 26,000 per 10 gm now. There aren’t many festivals, the marriage season too is off. The festival season does not look to be much too great in coming months. So, these are very timid kind of months coming ahead for any kind of festivities or for marriages. _PAGEBREAK_ Gold particularly with respect to India is a kind of a commodity or an asset class which one would love to be in. Then, when you do not have any festivals and any marriage season coming out, that, alongwith the international markets cueing down towards the negative side, creates pressure on the downward side of the trajectory for the gold prices. Hence, we continue to remain bearish on gold. Talking about which way the market should behave in coming days and months. I think USD 1,320-1,325 per ounce would be great levels to watch out for. But my view would be that markets would consolidate at around USD 1,350-1,375 per ounce in days to come. I do not see much of the physical buying happening for these months in India and not in China too, so overall it looks to be a little sideways kind of a movement with a bearish momentum picking up. But overall, we are bearish and therefore our intraday call also would be to sell the gold today on the markets at around Rs 26,150-26,200 per 10 gm levels. We would recommend stop loss for this trade at around Rs 26,330 per 10 gm and the targets on the downside would be in the range of Rs 25,940 per 10 gm. Q: The slight difference this time around compared to April was that in April we saw both international gold prices falling and the currency actually appreciating. This time around we have seen big dollar strength and we have seen the rupee go to 55. Does that change things slightly in terms of the Indian scenario for gold prices? Mathur: We saw the prices crash down to a large extent in international markets, it was around USD 1320 levels. In the Indian markets, we saw the prices ticking down to around Rs 25,500-26,000. Because of the rupee appreciation we didn’t see much of upside movement from there. However, we saw the prices hovering around Rs 26,500-27,000 per 10 gm in the last couple of days. The rupee has been depreciating. It was appreciating a month earlier. There is news that RBI may cut interest rates, which will be kind of positive for the macro level scenario but for rupee, it will be a little negative. The overall depreciative tone may hold the prices at around Rs 26,000-25,500. Q: Do you think that if in case there is a significant amount of correction in gold from these current levels, what would be the reason for the correction? There are lots of cues that may be central banks are letting go off positions in terms of gold and the other point being that may be there is just a reallocation of asset portfolios globally from hedge funds etc simply because they are shifting more towards risk on asset classes. If in case there is further downside in gold what will be the key reason for it? Lennox: Some of the equity markets around the globe are now at record highs and others have started to see some recovery for example the Japanese market. We do think that is going to be key for direction of gold over the next three-four months for its recovery is that you don't want to be in an asset class that is possibly moving side ways when there is the potential to perhaps go to some of the really undervalued equity markets that we have seen and pick up some very early increases in value in those particular markets. There is a rotation now out of gold into equity markets. We have seen it in the US markets and that is now trading at records. We will see it continuing into some of the secondary markets that have really not moved much in value for some time. Q: Brent crude has been stable at USD 103 per barrel; it has not seen much of a movement. What levels are you expecting on that one? Lennox: We have certainly not changed our view. We do think that USD 120 is the top for Brent for sometime now. When you have a look at the broader macro scenarios for oil, we have seen much muted demand from the three biggest users - US, Europe and China. We have seen fresh production coming in the US. This would be a sign that the Brent price will have difficulty rising and if anything it probably should continue to soften. The only swinger to that would be what OPEC is possibly going to do and as we have seen they have increased production through April, which would make the scenario a lot worse.