The S&P GSCI Gold lost 3.9% in May and has hit its lowest index level since January.
This questions whether gold can recover after its biggest historical drop since 1981. According to the Federal Reserve, the U.S. economy is strengthening, labor market conditions are improving and inflation has been low in the expanding economy. According to Yellen, “looking ahead, I expect that economic activity will expand at a somewhat faster pace this year than it did last year, that the unemployment rate will continue to decline gradually, and that inflation will begin to move up toward 2 percent.”
These comments don’t fare well for gold so India’s import policy may be its only hope for price recovery. Below is a summary of questions from a recent interview about the driving forces of gold.
Gold prices have cooled off in recent weeks and are hovering at around $1280-1290 an oz. The price is much below the year-before when levels of about $1380-1400 was seen in May 2013. What according to you is causing weakness in gold prices? The idea of gold as a safe haven means investors have used gold as a store of value. As the Fed tapers, the risk-off environment is subsiding with a potentially improving U.S. economy and stronger dollar, so the demand for gold as a safe haven has declined putting pressure on the price.
What are the factors that can help gold prices recover from these levels? Do you see that happening any sooner? A crisis might drive up demand for gold, which we have seen in mini waves as compared with the sizable global financial crisis. Recently spikes occurred from the tensions between Ukraine and Russia. Other supporting factors could be if Indian imports improve from lesser restrictions or if the Chinese local premiums increased to about double their current $3 levels over the global benchmark.
India has been a major gold consumer globally. The Indian government had taken measures to restrict gold imports to bring current account deficit under control. Are these measures hurting the gold market globally? How do you think Indian policies with regard to gold play a role in global price determination? Anytime an outside force interferes with the supply and demand equilibrium, there is an impact. India’s restriction on gold imports has had an adverse effect on the price of gold by fundamentally enlarging the supply pool in circulation – or in other words – restricting demand from the world’s second largest consumer.