Gold may retest Rs 25,500-25,200 per 10 grams in immediate short term.

Gold prices have been trading in a narrow range on international bourses as mixed cues from international markets have failed to offer any clear direction to bullion. The yellow metal has been holding on to $1260 per troy ounce support mark, where the safe haven demand arising out of tensions in Ukraine and the concern that the US economic recovery may be fragile is helping it hold the ground.

FOMC's steady stance on retreating from the extraordinary easy monetary policy has put pressure on the bullion. Also, slackening physical demand in China and India, the two biggest consumers of gold, in first quarter of 2014, coupled with the huge outflows from the world's largest gold ETF SPDR, wherein holdings are at five years low, are leading to a negative sentiments developing in prices.

The appreciation in the rupee over the past few months has taken it to 11-month high recently. This is currently adding to the pressure on prices given the fact that India remains a net importer of gold.

The RBI recently allowed select trading houses, in addition to already permitted banks, to procure the precious metal in the country, thus easing supply concerns and prices too.

The Reserve Bank of India in July last year had imposed severe restrictions on gold import in order to check the burgeoning current account deficit and sliding rupee, which led to decline in demand of gold by a whopping 26% to 190.3 tonne during the January-March quarter.

One of the first economic policies that the new government is expected to consider might be to relax restrictions aimed at curbing the volume of gold that the world's second largest consumer of gold can import under the so-called 80:20 rule. Further, the government is expected to slash import duty on the gold, which can put more pressure on prices in the short term.

For the second quarter of the year, despite a wide range of potential geopolitical risks, events in the US are expected to remain the most important determinant of international gold prices. As the US economic situation improves, gold may lose spotlight.

Given the fact that the US interest rate cycle is set to rise, the opportunity cost of holding gold would increase. With the potential for a stronger dollar, the need for an alternative safe-haven could also diminish which can bring the prices in some consolidation phase in the short to medium term.

In short term, prices are expected to continue on the downwards trajectory. They have breached the crucial support of Rs 27700/10gms and now remain vulnerable to test Rs 25500-Rs 25200/10 gms in the immediate short term and in international markets, prices might test the $1200-1220/oz mark.

Lower levels are however expected to entice buying interest and it is also expected that gold imports in India may double after the import curbs are eased and the demand, which had moved to illegal channels, would be back in the market.

Chinese gold consumption is also expected to remain strong during the second quarter of the year, which would lend a support to prices.

From a long-term perspective, prices are expected to gather momentum as lower levels would ignite buying from India, wherein demand is normally resilient. Along with this, annual gold demand among Chinese consumers is expected to reach 1,350 tonnes by 2017 from the current 1,132 tonnes, according to a World Gold Council (WGC) report. Globally also, as prices near $1200/oz, which is cited as its cost of production, we might see renewed buying interest.

Overall, investment demand and central bank buying is expected to pick up pace, which would likely arrest the selling pressure around lower levels, both globally and domestically. On the supply side, there is not much increase in mine production in the last 3 years and supply of annual recycled gold has declined for the sixth consecutive year, which is another factor favorable for gold in long term.

Prices in 3 years' timeframe might witness the resumption of overall uptrend after this phase of correction in an overall bullish set up is over. They are expected to again test the previous high of levels close to $1920/oz and breach of the same would even imply surge towards record highs of around $2400/oz after this phase of correction in an overall bullish set up is over.

A staggered buying approach at lower levels would be prudent for investors.

Source : economictimes.indiatimes.com