- India hiked gold import duty again
- More downside on the cards for gold
- Gold position liquidation to restart
Revision in India gold import duty….again
Authorities in India decided to revise the gold jewellery import duty again. It was raised from 10% (last revised on 13 August) to 15% on 17 September. This is the latest move to curb gold imports to improve the current account deficit. These measures will have a serious impact on gold demand from India this year. Moreover, the recovery of the INR may also take away a reason to hold gold (as inflation protection).
Pressure on gold prices is building…
Over the last week, the sell-off in gold prices resumed and even gained pace. The weaker than expected US economic data at the end of last week resulted in financial markets positioning for a dovish Fed this week. Usually this is great news for gold and precious metals. But this time around, the adjustment in expectations only resulted in a relatively small recovery in prices and this recovery was short-lived. The exit of Mr Summers resulted in only temporary respite for gold prices. This behaviour of gold prices can be explained by lower safe haven demand, with calmer emerging markets following lower US yields and a reduced risk of escalation in the Middle East (see chart). In addition, expectations of physical demand from Asia for the second half of this year have also been adjusted downwards. The fact that gold prices came under pressure again this week, despite the weakness in the dollar, is a strong sign that the bottom may be pulled out under gold prices again in the near-term. Gold prices dropped overnight below 1,300 USD/ounce level but bounced above it later again. The next support level is 1,273 USD/ounce.
… with more downside on the cards
We remain negative on the outlook for gold prices in the coming quarters. A combination of strong US growth, constructive investor sentiment and subdued inflationary pressures in the advanced economies will be a negative cocktail for the metal. The sell-off in gold prices should have a negative spill-over effect on the other precious metals, where the liquidation of investor positions will push prices lower and dominate the impact of a stronger global economy.
Gold position squaring stabilized… but not for long
The gold position squaring has stabilized but there are signs that investors are becoming nervous again. The latest futures data show that investors have stopped liquidating short gold positions, but have continued to clear long gold positions. As a result, the net positions moved lower compared to the week before. Total gold ETF positions have stabilized, but we believe this is only a temporary phenomenon. There are still large positions to be squeezed and a further deterioration in sentiment will most likely trigger this.