China and India are perhaps the two key markets for gold and this puts the precious metal in an interesting position over the next few weeks.
Emerging markets have been firmly in focus as growth concerns continue to weigh on gold and other commodities. Initially the assumption was a slowdown in China would lead to aggressive stimulus measures, which would ultimately benefit gold. However, inflation is dropping off along with growth prospects, and with China being the largest importer of the metal, the recent slowdown has seen gold significantly on the back foot. In fact there had been a couple of things keeping gold afloat including the Fed’s huge QE program, Japan’s stimulus program and the Russia/Ukraine tension.
Apart from Japan, all the other factors are dissipating and this is pulling the rug from under gold. Since its March highs, gold is down a whopping 10.3% to date and is threatening to slide further as analysts now focus on India.
Monsoon season to be delayed
Apart from the recent conclusion in Indian elections, it seems there is a real concern of an El Nino effect on gold prices. The monsoon season has long been considered a significant period for gold as it helps boost gold demand from rural India. Analysts feel a good monsoon season is positively correlated to the gold price performance as it is with agricultural crop yields. Higher crop yields imply higher income for farmers and this in turn lifts gold demand. Just to put it into perspective, rural farming areas account for around 60% of Indian gold buying. The latest fear is that this year’s monsoon season is likely to be delayed by around 2 weeks. This threatens to impact gold demand and we also still seek clarity on any changes the incoming Indian government will make to import restrictions. The 80:20 rule will be particularly interesting, along with changes to hedging restrictions.
Food inflation could be a positive
While I’ve highlighted the negatives that could weigh on gold in the short term, there are also some potential positives that could put a floor on losses. Firstly there is a real risk of food inflation in the emerging market space. This could be a catalyst for some gold upside especially in countries like China. At the same time the ECB could be lining up a huge stimulus program this week and if they deliver a comprehensive package, then this could push up gold demand on two fronts. Firstly gold would rise on a potential spike in risk assets and secondly the threat of rising inflation on the back of the stimulus package could also lift gold demand. Having said that, I would still be cautious on the precious metal in the near term as I feel the risks far outweigh the less probable upside. From a price-action perspective, I would prefer selling gold on rallies into 1273 in the near term.