Gold's high in rupees bodes ill

Lacklustre physical demand in India, the world’s largest consumer of gold, can limit the upside in prices of the yellow metal, a Dubai-based analyst said yesterday.

Last week, gold hit an all-time high in Indian rupees owing to the metal’s steady decline in the Asian currency against the dollar. The year 2011 has seen gold surge more than 40 per cent in Indian rupee terms while it has gone up just 20 per cent in dollar terms, making it much more expensive for consumers in India, the world’s largest gold market.

“The market does still see continued buying from institutional sources while the gold price in some currencies is at or close to the all-time high (India),” Gerhard Schubert, Head of Precious Metals at Dubai-based Emirates NBD said yesterday in the bank’s weekly precious metals report.

“This could potentially slow the market down until physical buying resumes on these elevated price levels,” said Schubert, who is ‘slightly bullish’ on gold for the next week, and sees support at $1,700 and $1,670 an ounce levels, while expects resistance at $1,730 and $1,765 per ounce levels.

Gold has gone up by almost 30 per cent in Indian rupee terms in the past six months, whereas it has gone up by a little over 11 per cent in dollar terms, restricting retail sales in India despite a wedding season currently underway in the country.

“I still expect the danger to be on the upside as the long liquidation has already taken place, and fresh buying would hit an empty market. The downside seems well supported all the way down to the mid $1,600 levels,” Schubert said.

While the Euro zone issues continue to underpin the current price levels, the wedding season demand in India will end by last week of December, and halt briefly for three weeks, before re-starting at the end of the next month. This will mean that even if the Indian rupee strengthens after a couple of weeks, it will not result in immediate physical demand for gold, and thus global prices may remain constrained by this fact.

Gold prices, therefore, are likely to trend sideways due to an uncertain global economy and a slowing growth engine in India, where the government cut growth forecasts to between 7.25 and 7.5 per cent for the next fiscal, down from over 9 per cent average growth that the country saw in the previous few years.

The yellow metal, on the other hand, has also lost some investment interest as it climbed down from its ‘safe haven’ status, following weeks of violent fluctuations in the metal after its flash fall in September this year.

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