Gold Market Under Constant Pressure

Wednesday | June 12, 2013

Content
Gold market under constant pressure Gold demand and impact on prices Currency factor Gold versus equity performance Long-term View Near-term View Technical Levels for 15 Days

Reena Rohit Chief Manager Non-Agri Commodities and Currencies reena.rohit@angelbroking.com (022) 3935 8134
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Gold Market Under Constant Pressure

Wednesday | June 12, 2013

Gold market under constant pressure

For the kind of command that gold draws globally, factors affecting the price trend are immensely diversified. Hence, from monetary policy decisions to currency movements and demand-supply fundamentals, all factors provide direction to the price trend of gold, thereby making it a very complex move. In the current Indian context we have seen that, prices have taken cues from Rupee weakness along with the measures that the Reserve Bank of India (RBI) took in order to curb imports of the yellow metal as it is fuelling further increase in the Current Account Deficit (CAD). The RBIs move was primarily targeting a reduction in the CAD and it also aimed to reverse the depreciation in the Rupee, which in turn was having a negative impact on the Indian economy. However, the move of restricting gold imports by banks and nominated agencies and providing them the only open window for imports for jewelry exporters, that too only through the 100 percent cash payment basis has come in as a negative setback for the gold market. This we feel, may not trigger a sharp downside in demand but will create a supply shortage of the metal in the market. Hence, during the wedding and the festival season, increase in demand for gold could spike prices further. Additionally, the increase in imports duty will further raise the landed cost of gold in India. With these moves, the central bank will not be able to arrest the price rise or increase in demand but it will tackle the supply-side situation, where small jewelry exporters may not be able to fulfill the 100 percent advance cash payment method and in turn lead to an overall business loss. Stocks of major gold jewelry manufacturing firms have been hit badly due to the payment criteria involved in imports of the commodity. Keeping this in mind, we feel that the domestic gold market is in for a volatile phase, while the demand patterns continue to change, keeping in tandem with the price movement and the investor perception of the global financial markets. Coming to the gold import figures in India, that triggered the central banks move the Economic Advisory Council is expecting gold imports to touch 300 tonnes for the April-June quarter, a period when demand witnessed a sharp increase on the back of correction in prices. While physical buying saw a jump post the price crash, the ETF holdings witnessed a sharp correction. This trend was not only seen in the international markets but also in India.
Source: Angel Research, Reuters

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Gold Market Under Constant Pressure

Wednesday | June 12, 2013

Gold Demand and Impact on Prices

Spot Gold ($/oz) v/s Global Quarterly Gold Demand
1200

1150
1100 1050 1000 950 900 850 800 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q12013

1740
1720 1700 1680 1660

1640
1620 1600

Global Quarterly Gold Demand

Source: Angel Research, Reuters

Spot Gold ($/oz)

The adjacent chart shows how gold prices in dollar terms have moved in tandem with the quarterly gold demand. The movement indicates a 94 percent positive correlation and shows that rise or fall in gold demand has a direct impact on prices. When world gold demand peaked to 1188 tonnes during the Q42012, average prices during the same quarter has increased by 4 percent. However, a dip in quarterly demand during Q12013 to 963 tonnes lowered the quarterly average price to $1631/oz, marking a correction of 5 percent in prices.

The chart on the right hand side shows that gold prices on the MCX increased with a rising trend of imports and corrected simultaneously as imports declined. During Q42012, when gold imports increased to 255 tonnes, rising 14 percent from the previous quarter, prices also rose, marking a quarterly average of Rs31,240/10gm on the futures market. The correlation of these factors however is mildly positive as other factors like the Rupee movement also had an impact on prices.

India Gold Imports v/s MCX Gold Prices (Rs.10/gms)

31500

265
245 225 205 185

31000
30500 30000 29500 29000 28500 28000 27500 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q12013

165
145 125

India Quaterly Gold Imports

MCX (Rs.10/gms)

ETF Scenario and Price Trends

Spot Gold ($/oz) v/s Avg. SPDR ETF Holdings
1800 1750 1700 1650 1600 1550 1500 1400 1350 1300

Source: Angel Research, Reuters

1450
1400

+ve 87% correlation of Spot Gold Prices with SPDR Gold Trust Holdings

1250 1200 1150 1100

1050
1000

iii

Spot Gold Avg. Prices ($/oz)

Source: Angel Research, Reuters

Average ETF Holdings

Movement in ETF Holdings has provided major cues to Spot Gold prices and the adjacent chart shows that average monthly SPDR ETF Gold Holdings started witnessing a decline from Aug12 onwards but major withdrawals from the ETF were seen since the start of 2013. Spot Gold prices have shown a similar declining trend and the chart suggests a positive 87 percent correlation between the two, despite ETF demand accounting for just around 6 percent of total gold demand.

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Gold Market Under Constant Pressure

Wednesday | June 12, 2013

in the Indian markets too, a positive correlation of gold prices to the total gold holdings held by the Indian ETFs is seen. Although the correlation stands at 62 percent (lower than that seen in the international markets) from the period of Sep12 to April13, it is remarkable enough. Until Jan13, ETF Holdings were rising, but post that a correction was seen, especially in April13, when total Indian gold holdings in the ETFs declined 9 percent, with prices on the MCX in the same period falling 6.5 percent.

Avg. MCX Gold Prices (Rs.10/gms) v/s Avg. India's ETF Holdings
32000 31500 31000 30500 30000 29500 29000 28500 28000 27500 12500 12000 11500 11000 10500 10000 9500

MCX Avg. Prices (Rs.10/gms)

Source: Angel Research, Reuters

Average India's ETF Holdings

Currency Factor
Spot Gold v/s Dollar Index Daily Price Chart
1,800 1,750 1,700 1,650 1,600 1,550 1,500 1,450 1,400 1,350 85.0 84.0
1750

Spot Gold v/s Dollar Index Monthly Avg.

1700
1650 84.00 83.50 83.00 82.50 82.00 81.50 81.00 80.50 80.00 79.50 79.00

-ve 75% correlation

83.0 82.0 81.0 80.0 79.0 78.0

1600 1550 1500 1450 1400

-ve 81% correlation

Source: Angel Research, Reuters

Gold Spot-$/oz

US Dollar INDEX - ICE

Spot Gold ($/oz)

DX

Talking about international prices first, the movement in the Dollar Index has impacted gold prices in dollar terms immensely. The daily price chart on the left-hand side suggests that prices have been reacting in the opposite trend to that of the Dollar Index. Showing a negative 75 percent correlation to the Dollar Index, prices since 2012, have been impacted by strength or weakness in the Dollar Index.
Spot Gold v/s Dollar Index (June till date)
1,420 1,410 1,400 1,390 1,380 1,370 1,360 1,350 81.11 82.802 1413.15 83.00 82.80 82.60 82.40 82.20 82.00 81.80 1376.86 81.60 81.40 81.20 81.00

Spot gold prices fell 2.4 % and DX declined by 1.85 %

Gold Spot-$/oz
Source: Angel Research, Reuters

US Dollar INDEX - ICE

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In the current month i.e. 1st-12th June13, gold prices have shown a 66 positive percent correlation, lower than what was seen since start of the year. This is because safe-haven demand appeal of gold has reduced around the same time when markets are expecting a withdrawal of stimulus measures by the Federal Reserve. Hence, even weakening of the Dollar Index is not leading to buying support in gold, as markets expect the metal to decline once the Fed begins the pullback.

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Gold Market Under Constant Pressure

Wednesday | June 12, 2013

MCX Gold (Rs.10/gms) v/s Indian Rupee

32,500 31,500 30,500 29,500 28,500 27,500 26,500 25,500 57.5 56.5 55.5 54.5 53.5 52.5 51.5 50.5 49.5 48.5
27500 26500 30500 29500 28500 31500

MCX Gold v/s Indian Rupee Monthly Avg.

56.0

55.0
54.0 53.0 52.0 51.0 50.0 49.0

MCX- Near Month Gold Futures - Rs/10 gms Source: Angel Research, Reuters

$/INR - Spot

MCX Avg. Prices (Rs.10/gms)

Rupee

When the price correlation between MCX futures gold prices is compared with the Indian Rupee since 2012, it is seen that, as the Rupee weakens, gold prices in India increase. Thus, weakening of the Rupee in turn becomes a supportive factor to gold prices. However, the daily price chart also shows that, post the April price crash, the Rupee weakened consistently, but prices didnt take major cues from the same as overall price driving dynamics witnessed a change. It is clear in the monthly price chart that a steep fall in gold prices was seen Jan13 onwards, while the Rupee continued its journey downwards. The price driving factor during this period was the announcement made by the RBI that restricted gold imports by banks. Hence, gold prices in India during that period were predominantly determined by worries surrounding over the expectations on what measures the government would take in light of rising imports.

MCX Gold v/s Indian Rupee (June till date)

28,000 27,800 27,600 27,400 27,200 27,000 56.48 27,007

MCX Gold Prices gained 2.2 % and Rupee depreciated 2.5%

28,011

58.33

58.40 58.20 58.00 57.80 57.60 57.40 57.20 57.00 56.80 56.60 56.40

The adjacent chart shows that the sharp depreciation in the Rupee since the start of this month supported phenomenal gains in gold prices. While the Rupee weakened 2.5 percent in that period, futures prices on the MCX jumped 2.2 percent. However, the Rupee has reversed considerably after touching an all-time low of 58.98 yesterday. Hence, gold prices too are now expected to correct due to expected appreciation in the near-term.

MCX- Gold-Near Month Fut (1 kg)-Rs/10 gms

Source: Angel Research, Reuters

$/INR - Spot

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Gold Market Under Constant Pressure

Wednesday | June 12, 2013

Gold versus Performance of Equities

Spot Gold v/s Dow Jones Daily Price Chart
1,800 1,750 1,700 1,650 1,600 1,550 1,500 1,450 1,400 1,350 15,500 15,000 14,500 14,000 13,500 13,000 12,500 12,000

Spot Gold v/s Dow Jones Monthly Avg.

1750 15500 15000 14500 14000 1550 1500 1450 1400 13500 13000 12500

1700
1650 1600

Gold Spot-$/oz
Source: Angel Research, Reuters

Dow Jones Ind Avg

Spot Gold ($/oz)

Down Jones

Since the start of the year, Spot Gold prices have witnessed an 88 percent negative correlation to the movement in Dow Jones. Equity markets in the US are rising on the back of improvement in the US economy, whereas gold prices are correcting on expectations of a pullback in the bond-buying program of the Federal Reserve.
MCX Gold v/s Sensex Daily Price Chart
32,500 31,500 30,500 29,500 28,500 27,500 26,500 25,500 20,500 20,000 19,500 19,000 18,500 18,000 17,500 17,000 16,500 16,000 15,500

MCX Gold v/s Sensex Monthly Avg.

20000 31500 30500 29500 28500 27500 26500 19500 19000 18500 18000 17500 17000 16500 16000

MCX- Near Month Gold Futures - Rs/10 gms

Source: Angel Research, Reuters

Sensex

MCX Avg. Prices (Rs.10/gms)

Sensex

For the whole of 2012, gold prices in the Indian markets performed more like a risky asset, moving largely in tandem with the movement in the Sensex. However, post the April13 price crash in gold, the Sensex started witnessing upside, while gold prices performed negatively as the safe-haven status started diminishing.

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Gold Market Under Constant Pressure

Wednesday | June 12, 2013

Long-term View
World markets are currently looking at the improving US economic scenario, which in turn is highlighting the threat of a withdrawal of bond-buying by the Federal Reserve. We believe that, this step by the worlds largest central banker is not expected immediately. With economic data showing improvement on one hand, and mixed signals on the other, a sense of speculation with respect to the same is being witnessed in daily trading activities. With the amount of the bond-buying being humungous, we feel that the pullback will take place gradually. Keeping this in mind, the expected correction in gold prices due to a pullback will again happen ahead of the event and when the announcement occurs. Apart from golds linkage to the stimulus measures, we feel that overall demand patterns will further witness a change. Safe-haven demand patterns due to threat-based buying will largely reduce, thereby making riskier investment assets look more attractive.

Near-term View
In the current context, golds movement in the Indian markets is expected to be largely driven by the Rupee movement. A sudden reversal in the Rupee has come in after the currency touched an all-time low of 58.98 as the RBI intervened. The Rupee in the near-term is largely expected to trade with an appreciation bias, thereby adding to downside pressure on gold prices in the Indian markets. Technical Levels for 15 Days S1 MCX Gold August Futures 27200 (Rs/10gm) Spot Gold ($/oz) 1350

S2 26700 1330

CMP 27665 1376

R1 28300 1407

R1 29000 1442

Trend Down Down

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