Gold prices should not feel the heat

Recent slide in prices means any rate hike has already been discounted into recent price fluctuations of metal

Gold can still spring a surprise on the pricing side even with the US Federal Reserve finally getting around to raising interest rates on December 15-16.

According to some industry sources that factor has already been discounted into the recent price fluctuations of the metal. In fact, “the two key factors that pushed the price down — Fed rate hike fears and weakness in oil prices — have been largely discounted,” said Sudarshan Malpani, Managing Director, Alpen Asset Advisors Limited. “The surprise elements could be that the Fed may not hike rates very rapidly and oil prices could see some stability, given that oil has already fallen so much.

“The recovery in the US is still fragile and the Fed has repeatedly hinted that it will hike rates very cautiously. These factors point to a lower pressure on gold prices in the near future.”

Malpani’s perspective is still in the minority. The overwhelming sentiment is that gold prices will have to go through a slide irrespective of the extent of the Fed increase, and the first time it is doing so in just about 10 years.

Waiting game

And this is what the UAE’s consumers — and its jewellers — are waiting on. Gold closed at $1,074.08 an ounce on Friday, which represents a decline of $103 (Dh378) in the last six months and $148 over 12 months.

If gold does slip further after December 15-16, retailers are hoping there will be enough in it to get the consumers buying gold jewellery as well as bars and coins for investment purposes. In an ideal world for UAE jewellers, there would be a “gold rush” as was seen in the three weeks from July 2223, when it dropped to $1,090 an ounce and around Dh124 a gram based on that day’s Dubai Gold Rate. The shopper stampede cleared nearly every store of their inventory and pushed up the premiums on delivery for new stock to record highs.

“A repeat of that would be a best-case scenario … even volumes around 80 per cent of what was achieved in the two weeks from July 23 would be good,” said a retailer.

Good year

According to Tawhid Abdullah, Chairman of Dubai Gold & Jewellery Group, in a recent interview, “Except for the secondhalf of the third quarter, which was quite weak, the jewellery trade’s performance in each of the other quarters was quite solid, and with some spectacular weeks in between. If 2016 promises more of the same, and with some help from lower prices, it can be a good year.”

That’s as far as the UAE — and the Gulf’s — retail level sentiments go. But what of global institutional investors?

“For them, gold is an important hedging tool to cover against market uncertainties,” said Malpani. “In times of crisis, gold will be in demand and given the uncertain times we live in, institutional investors will never go away from gold completely.

“While the gold prices are currently low, the upside is rather limited. Hence we do not see investment demand from the price appreciation perspective.”