Comex and spot gold prices both declined by 1.5 and 0.5 per cent, respectively, in the last fortnight (5th June-15th June 2017), while MCX gold prices moved up marginally by 0.02 percent in the same time frame.

In the run up to the US Fed meeting which was scheduled on 13-14th June, many in the market expected the US central bank to raise the rates while Fed Fund Futures also signalled the probability of it happening by more than 90 per cent. As per expectations, the US Fed has hiked its interest rate by 25 bps the fourth of its kind since it first hiked rates in December 2015. It also signalled one more rate hike in 2017, followed by another three rate hikes in 2018. Fed chair Janet Yellen also spoke about normalisation of balance sheet size of the $4.2 trillion relatively soon.



What this means for commodities:
It clearly means that the extra liquidity which was infused by the Fed for so long will no longer be there in the system as they prepare for gradual unwinding of the balance sheet. This means, gold and silver will no longer be an attractive investment in a scenario where US economy is gaining momentum while crude oil has its own set of complex factors ranging from high inventories, OPEC compliance on output cut, increasing rig count in the US leading to higher production and the factors alike, pushing down oil prices which currently trades at $45 for WTI and $47 for Brent.

On the other side, one thing has to be noted that the surplus cash generated by oil producers from high oil prices is invested somewhere in some part of the globe. In a scenario, wherein the central bank talks about sucking liquidity from the system and lower oil prices spells trouble for commodities as an asset class to generate higher returns including gold.

The other trouble as far as Indian markets are concerned is the GST on gold. The speculation over the Goods and Service Tax rate on gold and diamond Jewellery is finally over with the government finalising the rate at 3 percent, while the import duty (custom duty) of 10 percent stays, which will be over and above the 3 percent. However, at present, the total levy on gold would be around 13 percent (10% customs duty + 3% GST), effectively an increase of around 1 percent than the industry expectations of the 12 percent. For healthy development of trade, GST should ideally be less than or equal to 12 percent. Effectively, this would result in an increase in jewellery prices of gold, sliver, and diamonds, however marginal it will be. This additional cost will be passed on to the consumers.

Gold demand in India for the first quarter 2017 saw an increase of 15 percent to 123.5 tonne. vis-a-vis total demand of 107.3 tonnes for the same period in 2016. WGC maintains its full year demand forecast of around 650-750 tonnes in 2017, considering the challenges arising out of pan card registration, restrictions on cash transactions and introduction of GST.

The way forward
Increasing probabilities of rate hikes in the US in 2017 as well as 2018 and unwinding of the FED balance sheet size of $4.5 trillion spells trouble for gold prices to move higher. US economy is improving, bringing optimism and growth story back on cards for investors across the globe to cheer about. In this scenario, investors will remove all their money from safe haven assets and move towards risk assets which in turn will lead to fall in the prices of precious metals.

For the time being, let’s go with the trend, gold prices will head lower in the near term towards $1220 while on the MCX, gold futures can possibly move lower towards Rs.28000/10 gms.

 16 Jun 2017, 10:47 AM