Jewellery sector on lookout for further fall in gold price
US INTEREST RATE HIKE COULD PUSH GOLD TO AROUND $1,040 AN OUNCE AND LOWER
The UAE’s jewellery trade expects gold prices to slip to $1,040$1,045 (Dh3,820Dh3,838) an ounce in the days immediately after the US Federal Reserve were to hike interest rates by 0.25 per cent.
Anything higher than that could create enough downward momentum for gold prices to drop closer to — or even below — $1,000 an ounce, according to various projections by market sources. (Gold started trading on Monday at the $1,075 range.)
“Current prices have already factored in a bare minimum Fed hike — what needs to be seen is whether the Fed will raise rates by a higher than the expected margin,” said Cyriac Varghese, General Manager at Sky Jewellery. “That’s why it is felt that any further decline will not immediately be a steep one — more to levels of around $1,040 an ounce.
“But at some point early next year, if the current situation remains of a strengthening dollar and further Fed rate increases, then gold could see a $50 drop.
“Observations on gold price movements are always very delicate — it is more in finding reasons for the movements. Right now, it’s being dictated by what happens to the dollar.
“Ultimately, for retailers, it becomes a question of strategy and the right approach. But with gold in such a downward movement, there can’t be a better time to keep an open position.”
Holding on to cash
Transaction levels in the local gold and jewellery trade over the last few days have mirrored the uncertainties surrounding where metal prices are heading next. Shoppers are holding on to their cash rather than commit to a gold purchase before the Federal Reserve’s meeting on December 15-16. Even those shoppers who might never have heard of Janet Yellen, the Fed Governor, and the upcoming meeting have this instinctual belief that something is bound to happen with gold. The market grapevine is buzzing with speculation on what would be the “ideal” pricing level for gold in the coming weeks.
“Most jewellery retailers are keeping open positions on their upcoming stock purchases until after December 16,” said Varghese. “Traditionally, all stock sold on a particular day are replenished immediately.
“The rest of the inventory needs are bought on hedging positions, usually of two to three months. But in the current situation, we can be reasonably
Observations on gold price movements are always very delicate — it is more in finding reasons for the movements. Right now, it’s being dictated by what happens to the dollar. Ultimately, for retailers, it becomes a question of strategy and the right approach.” Cyriac Varghese | General manager, Sky Jewellery
sure that gold will still drop some levels.” (In the not so distant past, when gold prices were hurtling along to $1,900 an ounce, retailers’ hedging would extend to anywhere between six to 12 months. At the time, the majority view was that gold could easily push past the $2,000 mark.)
Hedging
But some jewellers prefer to stick with a fully hedged position, irrespective of the current softness in prices. According to Ramesh Kalyanaraman, Executive Director at Kalyan Jewellers, “That’s the way we prefer to source — this way it doesn’t really matter where prices are on a day-to-day basis. There’s no upside costs ... or downside this way. The only exception is when we sell a certain weight of gold through our stores on a day and restock it that day itself at a lower price.
“However much the industry tries, there is no way anyone can authoritatively say that gold prices are going to behave in a certain way. That’s the reason for our caution.”
If, however, gold slips in the days after December 16, it will provide a boost for the jewellery trade to close the year on a high. Currently, tourist driven gold purchases are nowhere near what they were in the last three years. It’s domestic shoppers who are providing all of the buying support for the trade, estimated at around 80 per cent now compared with the 65:35 split earlier.
A gold price at around $1,040 an ounce — or closer to $1,000 — should get those tourists buying again.