Gold Prices at 4-Year Lows: Should You Buy Now?

Gold prices have dropped to 26,350 levels in India - the lowest in nearly four years. And some analysts say that gold prices could be heading even lower. A weak trend in global markets, strong US economic data and a stronger dollar have been cited for their weak outlook on the precious metal.

Here is why analysts expect gold prices to fall:

Dollar's rise against major currencies: The rise of the greenback has been one of the big factors behind the plunge in global gold prices. The gains in the greenback negatively impact the price of commodities priced in dollars such as gold, silver and oil. Since gold is a dollar-denominated commodity, it becomes more expensive for buyers in other currencies to purchase the yellow metal when the greenback gains. This tends to impact gold demand.

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The dollar's price, as measured by a basket of six major world currencies, is at four-year high levels of 86. Analysts expect the dollar to rise even further as the European Central Bank is expected to announce some form of quantitative easing programme in the near future to perk up the growth in the Eurozone. Gautam Shah, senior vice president at JM Financial Services, expects the dollar index to rise to 92 levels. Recently, the Bank of Japan announced a surprising stimulus programme which sent the dollar to seven-year highs against the Japanese currency yen.

Rupee's resilience: The cost of gold in India is linked to the value of the rupee against dollar as most of the gold requirement is imported. Though the dollar has gained significantly against other major currencies, the Indian rupee has shown remarkable resilience. The rupee has held on to the 61/dollar level despite a lot of turmoil in the global currency markets last month. HSBC Global Research expects the rupee to remain stable in 2015, boosted by narrowing twin deficits - fiscal and current account - and lower inflation.

"We expect the gold prices to remain bearish and if the rupee continues to rule at current level the yellow metal may touch Rs.24,500 level by December," Motilal Oswal associate vice president for commodities Kishore Narne said. Echoing similar views, Commtrendz Research director Gnanasekar Thiagarajan said the prices are expected to be around Rs. 25,000-25,500 by December if the rupee continues at the current 61 levels. (Read more)

Weak global prices: In global commodity markets, gold was trading near its lowest since 2010, at $1,168 an ounce. With gold breaking the critical support levels of $1,180, there could be more downside to its prices, said Vikas Vaid, product head of commodity and currency at Prabhudas Lilladher. He expects gold to consolidate at $1,125 levels.

Strong US economic data: The recent string of strong US economic data has also dulled gold's appeal as a hedge against risk. The Federal Reserve in its recent assessment voiced optimism about the US economy while ending its stimulus programme, called QE3. The upbeat assessment of the US economy has also contributed to the dollar's rise.

Expectations of an interest rate hike in the US by mid-next year, the improving US economy, bearish trend in crude price, stable geo-political issues and strengthening US dollar will put pressure on gold prices in the mid-term, said Naveen Mathur, associate director-commodities and currencies at Angel Broking.

India gold demand: Though gold sales in India boost this festive season due to lower prices, analysts don't expect a substantial pick-up in demand at current prices. "Demand is not increasing. Normal demand is there, but the reduction in prices has not induced any fresh buying," said Bachhraj Bamalwa, director at the All India Gems and Jewellery Trade Federation. Harmesh Arora, a partner at National India Bullion Refinery, said investors were cautious, thinking prices will fall further. "There is now uncertainty in the market, and consumers are waiting for price stability," he added.

"Gold demand could pick up if prices fall by Rs. 1,000 from current levels," said Mr Vaid of Prabhudas Lilladher.

(With Agency Inputs)

Disclaimer: "Investors are advised to make their own assessment before acting on the information."