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October 6, 1999


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When gold turns bullish, Indians run away

Dilip Shah

Gold prices in the Indian bullion markets have regained lost lustre with a bang but demand resistance capped the record rally later in the week, dealers and analysts said.

Global gold prices have rallied to a two year's high after touching twenty year's bottom level in July when the Bank of England sold 25 tonnes of gold from its bullion reserve to activate foreign exchange reserve. The Bank still has 715 tonnes of gold in it's bullion reserve

. Global gold was down at $ 251-252 per ounce July but prices are now bouncing back on restricted rates by European Central banks. There was also an excellent response to the sale of another 25 tonnes of gold by the Bank of England on 21st September '99.

Global gold prices have jumped up from dollars $ 255-256 to $ 322-323 per ounce last week on smart recovery. However gold had fallen from this level to dollar $ 299 to $300 as producers and miners booked profit.

In the Bombay bullion market, 24-carat gold rallied from Rs 2,050 to Rs 4,725 and then settled to Rs 4,630 per 10 grams. Prices of gold biscuits (116.50 grams) were spurted by Rs 8,000 to Rs 55,500 but eared to Rs 54,500 per piece on demand resistance.

However, the sharp sprint in the prices has capped volumes in the domestic gold markets. 'Since nobody has a fair idea of was not known where the prices are heading, bullion traders were reluctant to enter into fresh commitments' said Dinesh Parekh, a leading bullion analyst and director of Bombay Bullion Association.

Daily gold volume has fallen to 20-30 kgs in the Bombay market against normal volume of 80-90 kgs. 'If prices will react and fall to reasonable levels, volume will again pick-up in the upcoming festivals which will last up to Diwali," Parekh said. A reasonable price level is Rs 5,000 per piece of gold biscuit in the domestic market and $270 to $ 275 per an ounce in the global market.

'Higher prices and the recent spurt may lead to recycling of existing gold in India in the festival season and may reduce demand for fresh gold' said. M Damani, president of the Bombay Bullion Association. Annual gold production is less than five tonnes in India against annual demand of 700 tonnes plus."We are mostly depending on gold import and any change in the global gold markets is bound to change the mood of the domestic marketer," he remarked.

In a policy statement, 15 central banks of Europe have said that they will limit gold sales to 400 tonnes a year and to 2,000 tonnes over five years. 'This statement has activated a record rally in the global gold market last week as short sellers have rushed to cover positions, " Parekh said. Traders have estimated a short sale of 60-65 millions ounces of gold in the global market prior to second sale (auction) by Bank of England on 21st September.' However change of mood and record rally in the global prices have promoted brisk covering by these short sellers," he added.

European central banks are holding 70 per cent of of the total gold holdings in the world's central banks vaults. An annual limit of 400 tonnes of sale by these banks war hammered out on the sideliner of a meeting of the International Monetary Fund .

Revaluation of the gold reserve of 100 million ounce by IMF instead of selling gold in the open market has also activated the bullion mood in the global market. Analysts said resistance for gold at $ 315 and support at $ 295 per an ounce. 'Long positions are liquidated to book profit after quick rise in the prices," one analyst said adding that gold miners and particularly Australian producers have turned sellers after record rise in the prices.

'Bombay gold prices have failed to cross last top of Rs 4,850 per 10 gram of 24 carate gold recorded in May ' 97," Dinesh Parekh said. "This top is likely to remain untouchable in the near future."

The Bank of England has gathered 206 million dollar by selling 25 tonnes of gold of 21st September. Now fresh sale of 25 tonnes is scheduled on 29 November which will be followed by the sale of another 25 tonnes on 25 January 2000. Bull run in the global market and steady rise in the dollar value against the Indian Rupee has dragged import cost of overseas gold upward in India. 'Now the inflow of smuggled gold may climb," one jeweller said," Anyway local demand is cool and prices are again under pressure."

The demand for gold has been affected partly also because of the unauspicious 'Shradh paksha' period in India--people keep away from buying precious metal. However , the progress of monsoon across the country has been satisfactory and demand rom rural India is likely to pick up in the ensuing festival period.

"Farmers are having a good earning from new crops and this money (saving) will flow in the bullion market, provided prices may stabilise at a reasonable level at the recent jump," Damani explains.


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