Gold continues to remain bearish; target Rs 26350: Emkay

Emkay Commodity Research has come out with its report on "Overview of Global Economy and its effect on Gold & Silver". According to the research firm, gold continues to remain bearish after attaining extended targets in the quarterly reports as uncertainty in the Euro zone eases and the US economy shows signs of improvement.

Cyprus Bailout -The Cyprus's parliament has accepted the bailout plan chalked out by the EU and the ECB and will receive its bailout funds of 10 billion Euros in May. This has saved Cyprus from exiting the euro zone but it is expected to sell its excess gold reserves of 10 tonnes to raise around 400 million Euros to meet its financing needs. Though it is a very small amount, this would be the first major gold disposal by a euro area central bank since France sold 17.4 tonnes of gold in 2009. This created a fear that other struggling countries like Portugal, Ireland, Italy, Greece and Spain may be pushed to do the same. They hold more than 3,230 tonnes of gold between them, worth nearly 125 billion Euros. This led to the panic selling in gold when prices fell by USD 225 or 14 percent within two days, the biggest decline in three decades. Actual sell off by Cyprus is likely to further pressurize prices. Monetary Policy - The Fed in its latest policy meet has pledged to continue its bond buying program till labor market conditions improve substantially and unemployment rate falls to 6.5 percent while inflation remains well below 2 percent. The ECB also cut interest rates by 25bps which are at record low of 0.50 percent and also cited possibility for negative deposit rates. The easy monetary policies are likely to boost growth in the economies and have also boosted gold's inflation hedge appeal. However, inflation in US is at 1.5 percent and at 1.2 percent in the euro zone which is much lower than the central bank's comfort level. Also the future inflation expectations are well controlled which can limit the upside in demand for gold as an inflation hedge. US economy – The US economy has shown signs of improvement recently, especially the labor markets. The non-farm payroll numbers has shown substantial growth, while the unemployment rate has gone down to 7.5 percent. Also, the US GDP expanded by 2.5 percent for the quarter ended March. The positive economic numbers from US have boosted the equity markets which are at an all time high. The Fed's continued stimulus have also supported the equity markets and improved investor's risk appetite globally. This is likely to hurt gold's safe haven appeal and can push prices down. Also, consistently improving labor market conditions may prompt Fed to gradually scale down its bond buying program which has supported gold prices in the past. Gold ETF Holdings -Bullion holdings of exchange-traded funds have been falling and are down by 16 percent in 2013. Investors sold 174 metric tons through ETFs in April and USD 17.9 billion of value was wiped out. Another 13.2 tons from ETFs has been sold in May, taking combined holdings to 2,262.7 tons valued at about USD 107.3 billion SPDR Holdings- In April, the world's largest gold-backed exchangetraded fund (ETF), the SPDR Gold Trust posted a record monthly outflow in April of 142 tonnes valued at USD 6.6 bln. From the chart above we can clearly see that SPDR's ETF gold holdings were going down since December last year. However, gold prices still continued to inflate. This created a bubble between physical demand of Gold and its prices. Which means the actual demand was not there at all for gold and prices were inflated due to other geopolitical factors and issues. Continuous outflows from gold funds have created a very negative sentiment for investment in gold and are likely to push prices down. Our view on gold continues to remain bearish after attaining extended targets in the quarterly reports as uncertainty in the Euro zone eases and the US economy shows signs of improvement. Spot Gold prices gave breakdown below USD 1520 and fell to USD 1321.20 in spot. Prices now bounced back and prices again expected to face resistance around USD 1520 i.e. Rs.27500 around and selling can be seen there. On lower side prices can fall to USD 1440 and USD 1405 i.e. Rs 26700 and Rs 26350. Prices should not close above USD 1555 i.e. Rs 28100 to remain negative. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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