Gold Hits A Two-Year Low

The sharp dip in gold prices has had a cascading effect across portfolios, while the picture in India may look slightly better considering the forthcoming Indian festival of Akhsay Tritiya

Since the last couple of trading days, the yellow metal - Gold - has indeed been sought after. The reason being the sharp fall in the metal prices that has reached a 2-year low, to trade at USD 1,408.80/t oz. There are wild round of talks regarding the metal having witnessed an upward journey for the last 12 years till CY12 has now clearly entered into a bear zone. 

Let us take a look at the triggers that has led to the sudden fall in the prices of gold, which has been considered a safe haven for long. The prices of gold had declined by 5% on April 12, 2013 taking losses to more than 20% since the record close in September 2011. 

The US economy has been one of the most important triggers for such a fall as the recovery witnessed in the US economy has put some pressure on gold. Prices are down 17% this year as Federal Reserve policy makers favour pulling back USD 85 billion in monthly debt-buying this year. This will put a lid on the liquidity that was flowing to these commodities. Moreover, as the US equities reached a record high, it is definitely going to attract money flows, which investors might pull out from the commodities market. 

When we cross the Atlantic and land in the EU, one may think that the gold may move upward considering the crisis the region is facing and gold being considered a safe heaven. However, the Cyprus debacle didn't provide any support to the yellow metal. Prices also fell last week over speculation that Cyprus may sell gold to save on austerity measures. An April 9, 2013, debt assessment by the European Commission said Cyprus had committed to selling about 400 million euros (USD 525 million) of ‘excess’ gold reserves. In response to the disclosure, the Central Bank of Cyprus said it wasn’t considering a sale. It owns 13.9 metric tonnes of gold, according to the World Gold Council. That is valued at about USD 622 million. 

However, this news did not stop the fall of gold prices. Besides, there are indications that gold is fast losing its glitter. Holdings in the SPDR Gold Trust (GLD), the biggest gold-backed exchange-traded product, are the lowest in almost 3 years and hedge funds have cut bets on higher prices by 72% since October 2012.

Those were the global concerns; now let us look at the effect it has on the Indian markets. Major jewellery stocks and gold finance companies have witnessed selling pressure in today’s (April 15, 2013) session, tracking the weakness in gold prices. Shares of Tribhovandas Bhimji Zaveri dropped the most with a fall of 6.22%, followed by PC Jewellers (-5.09%), Shree Ganesh Jewellery House (-4.62%), Titan Industries (-4.25%) and Gitanjali Gems (-3.67%).

Companies involved in providing gold loans like Muthoot Finance and Manappuram Finance have also felt selling pressure where the prices of the stocks plunged by 15.74% and 9.33% respectively today. Also, banks like the Federal Bank have also tanked by more than 5% as it has an exposure to gold loans.

Going forward, we feel that the precious metal will witness some pressure going forward. In the Indian context, some upmove may be witnessed considering the forthcoming Akshay Tritiya, which is considered as an auspicious day for buying gold. However, global factors may be the ultimate determinant of gold’s movement and may remain volatile with a negative bias. Investors may, however, consider entering gold in a staggered manner.