Gold prices are expected to trade in a range as investors remained focused on a possible interest rate hike by the US Federal Reserve in its December policy meet.
Higher rates tend to weigh on non-interest-paying gold.
The yellow metal gained some ground last week and held on it this week after the European Central Bank (ECB) disappointed investors with a meagre cut in deposit rate against expectations of more, but it is still far from recovering the nearly 7 per cent it lost in November - the biggest monthly fall since June 2013.
Sugandha Sachdeva of Religare Securities said gold prices aren't likely to recover significantly until the event-risk (Fed's December meet) is gone.
"We are eyeing $1,040-$980 at the Commex in the short-term. Having said that, the depreciation of rupee will support domestic gold prices," Sachdeva added, saying the outlook nonetheless remains weak.
"If gold breaches Rs 24,800-level, it may head to Rs 24,400. This is a major support area...Levels around $980-$1040 offer a strong support area from where prices look to rebound. I do not see it breaking this level very soon," she told BT Online.
From a long-term perspective, Sachdeva advises to invest in gold around Rs 24,400-level, albeit in a staggered manner.
The low prices offer investors the temptation to buy the yellow metal. However, there are factors to be considered before you take the plunge:
1) Dollar strength: The US Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, hit a high of 100.38 in November on expectations of the Fed rate hike, which now seems highly likely after Fed Chair Janet Yellen said this week she was 'looking forward' to a rate hike, indicating the US economy has recovered from recession. The Fed's next policy meeting is to be held on December 15-16. "The next 6-month outlook on gold remains bearish because the strength in dollar index indicates US Fed hike is imminent," said Ajay Kedia of Kedia Commodities to BT Online. The yellow metal loses its appeal when interest rates rise as its value recedes relative to other interest-bearing assets.
2) Gold demand: The World Gold Council in a recent report said the usual uptick in demand in September-December quarter owing to festive season may not be seen this this time as a plunge in prices in the September quarter triggered early purchases, eating into the fourth quarter demand. "Lingering concerns over the health of the rural Indian economy and local gold prices remaining in close proximity to the Rs 27,000/10g level in recent weeks also give reason to adopt a prudent outlook for the usual fourth quarter uplift in Indian demand," the report added. Demand in China is also expected to remain muted, given the slackening macro picture. "But demand should begin to pick up in the closing weeks of the year, as momentum builds ahead of the Chinese New Year in early February," said WGC report.
3) ECB monetary policy: The world's two largest central banks - US Federal Reserve and ECB - stand in opposite directions on formulation of monetary policies. While the former is adamant on reducing quantitative easing, the latter is still printing money. This makes the case for stronger dollar against euro, thus a negative development for gold.
4) Yuan inclusion in SDR: The recent entry of the Chinese currency into International Monetary Fund's Special Drawing Rights (SDR) basket can also have an impact on gold demand as investors may turn more willing to hold yuan at the expense of gold. However, the inclusion may turn out to be positive in the long-term, because its emergence as one of the reserve currencies is negative for dollar.
"There is potential for the yuan's inclusion to be slightly beneficial for the yellow metal in the very long run, because gold generally moves inversely to the US dollar. Thus could be helped if the dollar's role as a reserve and settlement currency is diminished," Jeffrey Nichols, managing director of the consultancy American Precious Metals Advisors and economic consultant for Rosland Capital told commodity website Kitco.
5) Government policies: Expectations of a cut in gold import duty, which currently stands at 10 per cent, by the Narendra Modi government may also alter gold demand scenario. Commerce and Industry Minister Nirmala Sitharaman has urged the Finance Ministry to consider reducing the duty to 2 per cent. "There are expectations that govt may slash import duty in a span of one year... Industry is hoping for 8 per cent cut, but I believe there can only be a duty-cut of 2-4 per cent. If that happens, we may see proportionate fall in gold prices in domestic markets, but rupee depreciation will boost prices," Sugandha Sachdeva of Religare Securities, told BT Online.
Kedia believes the impact of gold monetization schemes, launched by Prime Minister Narendra Modi in November, may also play on domestic and international gold demand. "We don't expect Indian households to tap gold monetisation scheme, owing to their emotional attachment with the yellow metal, but temple gold may enter markets, because temples are heavily paying for security, but they are not getting any reward out of gold hoards," said Kedia.
"If government thoroughly markets the scheme, we may see at least 1000-1500 tonnes of gold entering markets. As net gold import in India stands at around 900-950 tonnes, we may not need to import gold for two years. If India, world's second biggest consumer of gold after China, doesn't import gold, it will create negative impact in the international market and can bring down prices to near $800 level," Kedia added.