Gold May Continue Heading South

Recent measures taken by the government in order to check rising gold imports are likely to have a only a short-term impact.
Team Money Today        Print Edition: July 2013

In order to check rising gold imports, which could widen the current account deficit, the Union government announced an increase in the gold import duty to 8% from 6% in the beginning of June. On May 28, the Reserve Bank of India (RBI) had barred banks and non-banking finance companies from extending loans against units of gold exchange-traded funds (ETFs) and gold mutual funds.

Though the moves are aimed at taming the demand for the yellow metal, analysts expect only a short-term impact.

"These measures may only impact demand in the short term. In the long term, a decline will happen when most of the Indian population has access to instruments that provide alternatives to investing in gold," says Nithin Kamath, chief executive officer, Zerodha, a brokerage firm.

The RBI's latest decision on gold ETFs and funds is also not expected to make a big dent in demand for the metal.

"One does not invest in gold ETFs and mutual funds for pledging them," says Vivek Gupta, head (research), Capital Via Research Global, an investment advisory company.

According to the central bank, the country's fiscal deficit for the financial year 2012-13 narrowed to 4.9% of the gross domestic product (GDP). The government sees the deficit at 4.8% for 2013-14, which is still way above the RBI's comfort level of 2.5%. In May 2013, gold ETFs had Rs 10,580 crore under them, according to the Association of Mutual Funds in India.

In the spot market, the price of gold declined around 10% to Rs 27,708 per 10 gram on 11 June 2013, as against Rs 30,631 on 1 January 2013. Analysts expect prices to decline further.

"Short-term traders are advised to sell when gold rises. The immediate support level for the yellow metal will be Rs 23,000 and thereafter at Rs 21,600," says Gupta of CapitalVia.

Kamath of Zerodha also expects the metal to decline. "Gold is a grossly mispriced asset and it has a long way to go on the downside. In the international markets, gold is likely to trade close to $1,100 (per ounce or 28.3495 gram) levels by the end of the year. It was trading around $1,380 on 13 June," he says.

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