Gold Prices Drop In Rupee Terms: Should You Buy?

Globally, the fall in prices of the precious metal gold to record lows does not shows huge deviation from prices in the domestic market. As against previous times, the metal has failed to lure investors as the safe haven in global world even amid heightened trade war fears largely on the back of increasing interest rate regime wherein investors now prefer to invest in high yielding US bonds instead of the metal.

Gold is highly sensitive to interest rates as any sharp movement in rates on the higher side relates to the opportunity cost of holding non-yielding metal.

Instead to talk of, the scenario has been of shorting the metal or by and large avoiding it.
Gold in the global markets has on a recent basis taken a hit in prices to levels close to $1200 as dollar has strengthened against a basket of currencies. The dollar index which measures the strength of the greenback against some six major currencies has peaked to record highs supported by global landscape taking cues from trade tensions which has augured well for the US dollar currency.

Interesting, gold is priced in dollar terms and in its light is available at a pricier rate in other currencies or less of gold can be hence bought.

So, here are few significant reasons for the fall in precious metals prices:

1. Acute shorting of gold from investment options such gold ETFs/ futures market: Holdings in the metal have taken a hit when it comes to gold ETFs and as per Reuters are down 4 million ounces. The sell position in the instrument has been for the highest run of 3 months continuously in as many as 5 years.

2. Demand for gold receded to its lowest in 10 years: The H1CY18 has been witness to record fall in the demand for gold largely on the back of weakest demand from India. And the recent devastating flood in Kerala will still make it worse, as Kerala accounts for the large chunk of demand for precious metal primarily during the Onam festivities.

So, going down we can expect further impact on the prices of gold with the dollar gaining strength and demand taking a hit.

In domestic markets, the prices of gold have plunged to eight month low levels, however in Tuesday's trade taking cues from the world markets where the dollar weakness uplifted sentiment in gold, gold traded higher. Also, festive buying season also boosted the sentiment and prices cheered with gains of Rs. 180 at Rs. 30,600 per 10 gram.

So, for investors who wish to decide whether to take a position in the yellow metal in the wake of declining prices, the ongoing US Federal Reserve will be of paramount importance as the fate of interest rates in the US will hence decide the price trajectory of the metal.

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