Would not be surprised to see gold push lower

While we continue to believe that gold, structurally and fundamentally, remains in an upward trajectory, we would not be surprised to see gold push lower, and even push towards its 200-day moving average of $1,600. There are two factors which are putting downward pressure on gold. The first is weak EM currencies in general, and the Indian rupee (INR) in particular.

The second is funding stress in Europe. Physical demand is much weaker than it was six weeks ago. Much of the demand weakness is from India where the rupee has depreciated by more than 7% since the start of November. This has pushed gold denominated in rupees to all-time
highs this month. Even now, with gold coming off in dollar terms, gold denominated in rupees is still very close to its all time highs. In August, with gold around INR80,000/oz — INR83,000/oz, we saw strong demand, especially from India. Currently the gold price is at INR88,000/oz. If the rupee stays around the current INR52/$ level, and gold falls to $1,600, gold denominated in rupees would be back at the INR83,000 level. We expect stronger demand from India once again at those levels.

As far as investment demand is concerned, funding stress, especially for European banks remains, as is evident from the Euribor/OIS spread which remains at elevated levels. We continue to believe that the dominant fundamental driver of gold is global liquidity, followed by real interest rates. Funding stress puts pressure on liquidity and thereby, gold too. Funding stress also raises real interest rates. If this stress becomes to acute, gold (and all other commodities for that matter, will come under extreme downward pressure). However,
we believe that major central banks would try to prevent a money market breakdown akin to 2008. We also believe that this assistance would prevent gold from collapsing.

As a result, we would see a price dip towards $1,600 as a buying opportunity.

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