Will Indians benefit from the fall in the global price of gold?

As widely expected, the US Federal Reserve on Wednesday raised interest rates for the third time this year, by 25 basis points (bps). The gold market had already factored in the rate hike though.

However, the actual announcement lifted gold prices quite unexpectedly and somewhat counter-intuitively. There was a surprise depreciation of the US dollar. As an expert pointed out, gold gained initially because of lack of revision to the Fed’s inflation and interest rate outlook. This led to a slight weakness in the dollar that supported the yellow metal.

After the US Fed announcement, the ECB has maintained a status quo on the policy rate and continues its accommodative stance.

Over the past weeks, gold prices came off their highs and recently declined below $1,250 an ounce, weighed down by a strong dollar, moderating geopolitical pressures and a weak demand outlook. No wonder investors cut their net long positions in gold futures. At the same time, ETF demand for the yellow metal has also been subdued.

Currently, gold is hovering around the $1,250/ounce level. What is the outlook over the next quarter?

The US Fed has forecast higher GDP growth and is expected to hike interest rates at least three times over the next 12 months. Indeed, there is an emerging possibility that there could even be a fourth hike in 2018, one more than what the FOMC’s projections imply.

In the event, the greenback will get stronger and the equity market will get a boost, both of which are unlikely to pressure the yellow metal down. Less committed gold bulls will surely exit the market as we go along.

At the same time, demand for the precious metal from important consumers — China and India — is likely to be subdued in the months ahead.

In India, inflation is beginning to rear its head and farm incomes have not shown any marked growth despite a near-normal south-west monsoon. If anything, there are crop losses due to unseasonal rains and prices of many grains and oilseeds continue to rule low. Rural incomes are under pressure.

Perhaps the only support gold can hope for next year is geopolitical instability, which can trigger haven buying. However, such support is transient. Temporary lifts to prices following geopolitical developments do reverse over time.

From here on, gold is likely to find it tough to explore its upside. If anything, downside risks persist. Over the coming weeks and in the first quarter of 2018, the metal has the potential to decline close to $1,200/oz.

Whether consumers in India will be able to fully reap the benefit of a fall in the international price of gold is a moot question. The rupee is showing signs of weakness. With a firming dollar, emerging market currencies are likely to turn softer.

As we move closer to Budget time, there are attempts to lobby the Union government for a reduction in customs duty (10 per cent at present) on gold import.

But the policymakers are most unlikely to concede the demand primarily given the revenue implication. The admitted position of the government is that gold is a de-merit commodity and not an essential item.

It would be a travesty if customs duty on a luxury consumption item such as gold is lowered when resource-poor farmers in this country are agitating for higher prices for their produce.

The author is a commodities market specialist. Views are personal.

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