Now, Never or Forever

These are the key three questions that many ask today. Let us take a step back and see what happened during April. The two days sharp fall during mid-April has raised many eyebrows. Many cited that safe haven nature of gold is under question with - dollar correlation not working; Cyprus and other Central Banks selling during times of distress; US inflationary expectation subsided despite record QEs; ETF selling (despite ETFs contributing only 7% of annual demand) and a possible a economic slowdown in China. The fact is it was the confluence of these factors that were play. But, is this the first of its kind fall in nature. The answer is No. Since 2001, there have been 7 times the fall in gold prices was more than 10% and each time after such fall, the markets rallied to make a new peak. Even domestically, after crossing Rs.25000 levels during 2011, gold prices in India tested these levels four times and rallied post such fall.

Things are bit different though here as gold never entered a bear phase as currency forces were at play. Thanks to Rupee. Does this take me by surprise? The answer is again No. I had mentioned way back in 2012 USDINR target of 58; also refer to my earlier Feb 2013 communication where I highlighted that dollar/yen appreciation of 20% occurred prior to 1997 Asian currency crisis and was expecting a similar fall with a USDINR target of 60. It is playing out beautifully as anticipated.

Thanks also to Indian government. They never let gold prices go down and restored the confidence of the Indian public had in gold. With 10% import duty and curbs on imports, the bullion industry was literally left with no supply taking spot premium to around Rs.1000. Throughout the history central bankers suppress gold prices in order to restore confidence on the monetary system. It happened in US in last century and it is happening again, not only in the western world but also in India now. These measures clearly substantiate the faith the larger public have in gold.

With QE tightening around the corner and irrespective of the trajectory the international gold prices may take, domestic prices are likely to be supported. Remain tactical is the mantra.