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Why Gold Prices Should Decline

Last update on: Feb 02 2017

The price of gold moves with supply and demand. There aren’t many fundamentals, because industrial demand for gold tends to be steady while demand from investors and households fluctuates. India and China tend to be big household buyers of gold, and expanding middle classes in those countries were given credit by some analysts for the long increase in gold prices.

Where will demand for gold move next? This entry from FTAlphaville indicates the price should decline. The main reason is that India is having problems. The post attributes the recent rise in gold to fears in India that the rupee would be devalued and indications are that demand soon will decline and with it the price of gold.

But given that we’ve now had a substantial episode of rupee weakening, SocGen :

At present, demand is also being deterred to a degree by the weakness of the rupee, which has helped to take local gold prices (before any local premium) up by 21% between 15th and 28th August, taking prices to a new record and very nearly reaching Rp100,000/ounce, before a mild correction at month-end. This surge in prices will choke off demand until the market has readjusted once more. Local premia, which had reached $40/ounce, have dropped towards $10/ounce

Which means, unless ETF investors return in size, chances are that gold prices are more likely to test lower ground in the next few days than higher ground.

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