Gold prices in Mumbai hit a five-month low at Rs 8,800 (99.5) and Rs 8,850 (99.9) per 10 gram on Thursday following a decline in the global prices and falling demand in the domestic market.
The near-month June contract on the MCX slipped, paring its intra-day gains today, dropping by Rs 15 to Rs 8,828 rupees per 10 gm.
A surging rupee, which rose about 8 per cent against the dollar between March and May, insulated the domestic gold prices from 6.54 per cent rise in prices of the yellow metal in the global market during the same period.
A $41 an ounce increase in gold prices in London during the period did not impact the prices in Mumbai's Zaveri Bazar, owing to cheaper imports of the yellow metal on the back of an appreciating rupee.
With the rupee stabilising and global prices on the decline, the yellow metal prices in the domestic market are set to drop further, according to analysts.
"The international prices are likely to drop further to $650 and if the rupee continued to strengthen, the yellow metal might decline by another Rs 400 per 10 gram in Mumbai," said S K Jain, president of the Chandani Chowk Jewellers Association and the Delhi Bullion Association.
Bhargava Vaidya of B N Vaidya & Associates is of the opinion that steady crude oil below $70 a barrel and resistance at the upper level have brought down gold prices to their realistic level. But, the prices could squeeze further to remain around $650 very soon, he added, reasoning that consumer and investment demand was likely to slow down in the months ahead.
The domestic demand for gold is expected to dwindle for at least a month, with the beginning of an inauspicious month since May 16. Traditionally, no new ventures, including the purchase of any precious commodities, are executed during the period.
Although India is not a price-setter, much of the price movement depends upon the change in consumption pattern in the country because India is the largest user of the yellow metal, consuming around 750 tonnes a year.
An analyst of a leading research firm in Mumbai is of the view that if gold breaks the downward barrier of $646, there is then a strong possibility that the yellow metal would slump to $626.
Gold typically moves in an inverse direction to the dollar as it is seen as an alternative investment to the US currency.
Hence, an appreciation in the dollar, which has been witnessed quite frequently, is likely to hit the overall sentiment in gold.
On Wednesday, a stronger-than-expected US industrial production and housing starts data gave the dollar a strong boost and weighed heavily on gold.
Analysts believe that the bullion was also hit hard by reports of an imminent sale of up to 400 tonnes of the IMF gold reserves.
According to an analyst at Scotia Mocatta, gold appears to be heading downward in the near future, with the stronger dollar, higher oil inventories and easing political tensions in oil-producing Nigeria.
Meanwhile, the fundamentals remained strong, with buyers spending $17.38 billion on gold in the first quarter of the year, up 22 per cent from $14.21 billion a year earlier, according to a report by the World Gold Council.
The report further said that jewellery demand swelled 38 per cent to $11.97 billion. The yellow metal consumption in the country rose substantially, with consumers buying 50 per cent more gold in the recent quarter than they did a year ago, amid robust economic growth and a strong start to the wedding season.
