2015 outlook: Tough year ahead for bullion

Though equities have performed well during the year, the commodities market has been under the bearish grip, held back by a strong dollar and weak demand. Bullion, crude oil, base metals like copper and lead and agricultural commodities (barring few oil seeds and spices) dropped significantly throughout the period. After delivering consistent returns till 2013, gold lost its momentum following signs of the US economic revival that lifted the dollar to multi-year highs. A strong greenback makes the dollar-denominated gold more expensive for the holders of other currencies, declining its appeal as a hedge. Reduced physical and investment demand also pushed the metal south.

Gold was hovering near its four-and-a-half year-low in November, while silver tumbled to its weakest since 2009. Bullion has been under pressure ever since the speculation on tightening of the US Federal Reserve's monetary policy has been running around. Off late, the US economy has been gaining traction. Economic indicators are signaling a positive economic outlook for the country. The second release of the US third quarter GDP had beat expectations and showed the economy grew 3.9% on an annualised basis. Overall, a greener outlook on the US economy has taken the shine off the yellow metal.

Moreover, the US Fed's increased confidence on the nation's economic recovery, which resulted in wrapping up the QE and speculations adrift in the market over raising the benchmark interest rate, saw the dollar shooting up. Dollar Index, which has an inverse relation with precious metal, surged to a four-year high, pressurising gold to move south.

Crude oil tanked to five-year lows after the Organisation of Petroleum Producing Countries (OPEC) refrained from lowering output. While the sharp decline in crude oil prices is favourable for the global economy, it dimmed the inflation hedge appeal of gold. Also, the Swiss voters rejecting a referendum on November 30 that would have required the Swiss National Bank to maintain at least 20% of its assets in gold added to the bearishness in the yellow metal. If approved, it would have required to purchase 1,500 tonnes of gold over five years. The commodity received little help from the demand front too. SPDR gold trust, world's largest gold exchange traded fund, saw its holding fall to 718.82 metric tonnes, the lowest since September 2008.

According to the World Gold Council report, global gold demand fell to its lowest in nearly five years in the third quarter of 2014. The total demand declined 2% to 929 tonnes as Chinese buying slid a whopping 39%. Still, there was a jump in demand from India, especially jewellery, which rose 60% in the third quarter on a year-on-year basis on seasonal demand.

In the meantime, India relaxed its stringent gold import norms last week. The government scrapped so called '80:20' scheme, wherein 20 units had to be exported for every import of 100 units. While this move is potentially positive for the market, it seems to have failed to lend the required support for gold.

Looking ahead, the outlook for gold looks lacklustre. Surging dollar will maintain downward pressure on gold. Expectations of monetary tightening in the US and extra-loose monetary policy elsewhere will probably fuel the up-run in US dollar that would continue to undermine appeal of the gold as an alternative and safe haven asset. Softening demand from China, one of the major consumers of gold too could hurt prices. However, even as markets may see some more downside, worries over global economic growth, geopolitical tensions and easing import norms by India could help the market.

Though we are witnessing a recovery in the US economy, the global economic health remains a major concern. Economic growth in Japan, Eurozone, China and other leading economies has been lagging. Also, markets will be closely tracking economic indicators from the US to assess if the current economic growth momentum is intact. Despite the fact that low crude oil prices are positive for the economy, the free fall in oil prices have made market wary over the global economic Comtradehealth. Moreover, further declines in gold prices will threaten the sustainability and operation of gold mines as the cost comes about $1,300 an ounce.

OUTLOOK

Looking ahead, gold is likely to trade with a broad negative bias as the prevailing fundamentals restrict a sharp recovery. On the international front, a congested trading inside $1,080-1,275 an ounce is expected initially, but, breaking any of the sides would suggest fresh direction of the yellow metal. Meanwhile, on the domestic market, a volatile rupee and concerns over government intervention on gold import perhaps weighed on the sentiments. The outlook of silver will also remain the same. Major rallies are least anticipated unless breaking the stiff resistance of Rs 43,000 in the domestic market. Meanwhile a short term recovery may be seen in the international prices if it convincingly trades above $18 an ounce.