Global gold prices suffered a big selloff on Monday amid a rising dollar, growing expectations of a rate hike from the US Federal Reserve and selling pressure in China. Globally, gold prices fell to their lowest level in five years while in India it fell to a two-year low of Rs. 25,700 per 10 gram.
Gold could fall another 10-15 per cent over the next 12 months, says G Chokkalingam, founder of Equinomics Research & Advisory. “We have been highly negative on gold for the last one year. China’s gold reserves were substantially below expectations and the upside of stock markets has taken the attention of investors there away from gold to equities,” he added.
China said on Friday its gold reserves were up 57 per cent at 1,658 tonnes at the end of June from the last time it adjusted its reserve figures more than six years ago. “This is dramatically lower than market expectations,” Citigroup analysts wrote.
China’s stock market plunged by nearly a third at one stage earlier this month from a mid-June peak, wiping around $4 trillion from share values but recently they have pulled back amid a barrage of measures from regulators and buying by brokerages and mutual funds.
Gold has failed to sparkle earlier this month even as global financial markets were roiled by the plunge in China’s stock markets and the Greece crisis. The yellow metal is seen as a safe haven when other financial assets turn volatile.
Mr Chokkalingam said he does not “agree that gold is a safe haven because at a time when wealth is down and incomes are down, people will rush to gold”.
The International Monetary Fund (IMF) earlier this month trimmed its forecast for global economic growth for this year. The IMF said the global economy should expand 3.3 per cent this year, 0.2 percentage point below what it predicted in April – the weakest since 2008 global financial crisis.
Now only Mr Chokkalingam, many other analysts have a weak outlook on gold. TS Harihar, chief executive and founder of HRBV Client Solutions Private, said there is a serious question mark over gold as an asset class in view of the rising dollar.
In the developed world, only the US is estimated to be the major economy to grow at about 2 per cent this year and this is likely to keep the value of dollar at a higher level, he added.
The dollar jumped to three-month highs on Monday, extending its recent run of gains as expectations of a US rate rise gathered pace. Mr Harihar expects the US central bank to hike rates in September. A rate hike by the Fed will attract more inflows into US Treasuries as the yields are expected to go up, putting further pressure on commodity assets like gold.
Jamal Mecklai of Mecklai Financial said that in the short term, gold prices may have reached bottom but it does not indicate that trauma is over for the yellow metal.
“If gold prices fall below $1,050 (an ounce), then there will be more pressure on gold prices. I won’t buy gold right now,” adds Mr Mecklai.