Gold prices plunged to a five-year low of $1,088 an ounce on Monday after improved outlook for the dollar and the easing of the crisis in Greece saw investors globally pull out funds from gold and switch to other assets.
The ripple effect led to prices of the yellow metal falling in India to a little above Rs 25,000 for 10 grammes, with the bearish sentiments likely to persist, according to analysts.
Gold opened at Rs 25,375 per 10 grammes and fell to Rs 24,904 at the MCX on Monday. It recovered a bit to Rs 25,059 but is likely to remain weak, say traders. The previous trading session saw gold close at Rs 25,485.
It has also led to a rise in prices of jewellery companies' stocks at the Bombay Stock Exchange on hopes that an increase in domestic purchases would profit such companies.
According to international reports, spot gold fell 2.4% at $1,106.90 an ounce on Monday, recovering from a steep fall of $1,088, the lowest since March 2010. The fall is being widely attributed to the strengthening of the US dollar as the world's largest economy comes closer to the rising of interest rates.
Global investors typically switch positions among various assets such as gold, currencies, equities and debt, based on future returns. With the dollar rising, most funds expect comparatively higher returns from the currency and are hence moving toward the dollar, pulling out their positions from gold.
"Gold has become unattractive as an asset class due to tight global liquidity and rising interest rates," said Kishore Narne, associate director at Motilal Oswal Commodities. "Moreover, the risk tolerance among global investors is currently high, so gold as an instrument to hedge is no longer valid. The scenario looks bearish and is likely to stay this way for at least 6 months," he added.
The impact is clearly being seen in Indian markets where gold prices continued to remain soft. Since the rupee, which is another alternative asset for investors, likely to remain steady given the Reserve Bank of India's forex operations to keep the currency steady, gold prices are not likely to rise soon. The trade expects the yellow metal to fall to about Rs 24,500 per 10 grammes.
Incidentally, the low prices are not seeing any major purchases in the domestic market as most investors are focused on the higher returns from the equities market.
"People are postponing purchases of jewelry on the hope that gold prices will fall further. There is very low demand currently in the local market and the trends indicate this to continue," said Narne.
This, however, is not deterring jewelry shares to rise with stocks of companies like Rajesh Exports and Shrenuj seeing a sharp rise. At 11.10am on Monday, shares of Rajesh Exports were trading up 2% at Rs 456, while those of Shrenuj rose 2.7% at Rs 37, on the BSE.