A 250 basis point tax cut and improving economic conditions have put pressure on gold prices, in both the physical and futures market, as the yellow metal is trading down nearly 5 per cent from its pre-Budget price.
Some analysts believe the precious metal may lose some more as rising yields and better than expected success in vaccination drive will lead money out of the non-yielding bullion. However, low level buying and wedding demand may provide some support.
“The vaccination process is too swift. We have also seen better recovery in the dollar index and treasury yield, which has a negative correlation with gold. Until we do not see some softening of yield, we should not see upside in gold price,” said Vandana Bharti – AVP, Commodity Research, SMC Global.
In the international market, she believes that $1,770 should provide good support. In India, she said the short term target should be Rs 46,800 with ultimate downside target at Rs 46,000. If this target is achieved, this means gold will fall 3.5 per cent from current levels of Rs 47,600.
Any recovery in prices, which is less likely given the fundamentals, should be capped at Rs 49,200. Dealers believe increased demand for physical gold, Exchange Traded Fund (ETF) buying and exports will lend some support to prices in coming months.
The demand for physical gold has already surpassed pre-Covid levels but the tax cut has not led to any instant demand in the physical market, said Prithviraj Kothari, National President of India Bullion and Jewellers Association (IBJA).
“Demand is good, prices have gone down which is a relief to customers. Marriage season is here as well, so demand will be there but there is not going to be too much positive impact due to duty cut. There is not much free liquidity in the market,” Kothari said over a phone call.
2020 was the worst year for gold in the last 25 years. Demand for gold in India in the calendar year dropped to 446 tonnes as compared to 690.4 tonnes in 2019, as per the latest report released by World Gold Council (WGC). However, by the December quarter the demand had recovered to previous year’s levels.
“I think Rs 47,200 should hold as it is good support for gold. I do not think prices should go too much lower because there will be demand for physical gold in coming months,” said Manoj Kumar Jain, Director, Head – Commodity & Currency Research, Prithvi Finmart.
For silver, which has seen massive volatility in prices in the recent days due to massive buying and selling by retail traders, analysts believe Rs 65,000 makes a good base. This means prices may fall by Rs 3,000 from current levels.
“We should see more corrections. Downside for silver could be towards Rs 65,000. While if there is a rally, the top will be Rs 70,200,” Bharti said.