Gold to benefit from safe haven buying; recommend buying on dips

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Aurobinda Prasad Gayan

Akshaya Tritiya is believed to be a favourable day to start a new venture, buy something significant, and most importantly, the best day or Muhurat to get married. Akshaya means eternal or something that cannot be destroyed. So, it is a popular belief that buying something that denotes prosperity, such as gold, on this special day, and assures unending affluence and growth. The day falls on April 28 this year.

The Indian gold market has been on a roller coaster ride in the last few months but things are improving. Imports and domestic sales fell sharply owing to the cash crunch post demonetisation. Imports have improved significantly in February with market players coming to terms with demonetisation.

Indian gold buyers have also benefitted from firmness in the Indian rupee, which has made domestic gold cheaper. Rupee has appreciated more than 5 percent against the US dollar so far this year. The currency has benefitted from upbeat economic outlook, progress on Goods and Serves tax (GST) and the increasing popularity of the Bharatiya Janata Party in state elections.

Outlook for gold demand has also improved amid upbeat economic outlook and expectations of normal monsoon. A near normal monsoon will boost farm revenues, increasing demand for gold.

The only hitch in the Indian market is the impact of Goods and Services Tax on bullion taxation. GST is expected to be rolled out in July, but there is no decision yet on rates to be imposed on bullion. Current taxation is around 12.2 percent (10 percent customs duty, average value added tax of 1.2 percent and 1 percent excise duty). Jewellers want taxation under the new regime to be at similar levels.

In the international market, gold has witnessed a five-month high near $1295 troy ounce but has corrected since then. Gold price weakened on improved risk sentiment after the first round result of the French Presidential elections. The sharp rise in gold prices in last few weeks has made it vulnerable to profit taking and this could continue in the near term.

However, from a medium term outlook, we maintain buy on dips view for gold. Gold will benefit from safe haven buying amid uncertainty about Donald Trump's economic policies, Fed's monetary policy, US government shutdown fear, elections in Europe and Brexit negotiations. We expect international gold price to trade in a range of $1240-1295/oz in the near term and bias may be on upside. In the domestic market, gold may trade in a range of Rs.28500-29500/10 gram and buy on dips is suggested.

(Author is Vice President-Research at Kotak Commodities)