Is gold losing its sheen?

Gold rally led by monetary support falters as problems over debt and economic growth resurface.

Gold, the bright yellow metal saw firm rally from its intermittent low around $1550 an ounce level in July to touch almost $1800 levels in the first week of October.

Broad market gains were bolstered by market expectations that weak batch of economic data from different global economies will push major global central banks for fresh monetary support.

Finally in first week of September, ECB came with bond-buying program which was later followed by quantitative easing or the QE 3 by US Fed.

Tapan Trivedi is Sr. Analyst at J RG Wealth Management.

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Easing measure in Europe and liquidity addition from the US pushed US dollar to four month low against Euro, further animating the trend in bullion along with other major riskier asset classes' namely industrial metals, energy alongside global equity markets.

In the Indian markets also gold gained strength during that period and hit fresh life-highs after accounting for depreciation in Indian Rupee in past few quarters.

Gold prices for immediate delivery at MCX touched life high near the Rs 32,500 per 10 gms mark in mid September.

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From those high levels however, both gold and silver have come-off sharply actually questioning whether the liquidity-based rally in key riskier asset classes would stay put.

Moreover, notwithstanding the rise in gold prices, basic fundamentals specifically on the demand side have not been favouring gold.

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As per a report from WGC (World Gold Council); global gold demand fell to its lowest level in more than two years in the Q2, 2012 inflicted by a drop in demand from key consumers India and China.

For India which imports almost 90% of its gold requirements from other markets; higher prices, weaker than normal monsoon and higher domestic inflation pushed the demand for bullion lower.

As per the report, Indian investment and jewellery demand fell to 181.3 MT down around 40% from 295 MT in Q2 last year.

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All the above factors are expected to impact the buying sentiment in Q3 as well.

In the current situation, since global economic environment is marred by persistent problems in the EU region and little support is coming from US and Chinese economies, the two most important economies globally; broad demand for the yellow metal seems continuing to remain muted globally.

The same thing can also be checked from the fact that international Spot gold prices are already down more than 5% from the $1800 an ounce levels as seen in early October, currently hovering around the $1700 mark.

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In Indian markets as well, gold prices for immediate delivery at the MCX stand near Rs 31,000/10 gms level, lower by nearly similar percentage as in global markets.

In India the last quarter of the year (Oct-Dec) usually witnesses demand improvement supported by major gold and silver investment and jewellery buying season in the country.

The major festival season of Dussera, Diwali and later Christmas coupled with start of Hindu marriage season around November drives higher jewellery consumption and investment in the metal.

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On the monetary side, this might be the first year in more than a decade when Gold may not hit a fresh life high (In dollar terms).

Overall trend for next couple of months in gold is expected to be around the $1600 mark on the downside and $1800 an ounce mark on the higher side.

A break on either direction is further anticipated to provide necessary push to the yellow metal with the bias seen on the negative side owing to rising concerns over Euro area debt.

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Escalation of ongoing debt issues in Greece and Spain is seen pressing the EUR/USD lower and drive traders and investors towards the safety of the US Dollar and US Treasury bills imputing the flavour for gold especially in US Dollar terms.

In that kind of a scenario, Indian prices for most active contract at the MCX are expected to be between Rs 29,500-32,500 per 10 gms.