Gold may fall another 4% to 7% as return to record highs looks difficult, analysts say

Uncertainty in the global economy, a fall in stock markets and growing worries over inflation have turned investors' attention back to gold prices. Gold is seeing demand as a safe investment. But US interest rates, the strength of the dollar and rising returns on government bonds are also putting pressure on its prices.

In the international market, gold had hit a record high of $5,602 per ounce. Prices then fell sharply. It is now estimated that gold could fall a further 4% to 7%. However, purchases by central banks and global tensions are also giving gold support.

Shares of big US technology and artificial intelligence companies fell sharply recently. The impact was not confined to the US. Asian stock markets, including South Korea's KOSPI and Japan's Nikkei 225, were also affected. As selling pressure grew, investors moved their money into government bonds and gold to keep it safe.

This higher demand lowered returns on government bonds and also pulled the dollar index down. As a result, gold found support at around $4,150 per ounce in the international market. But US inflation figures came in higher than expected, and interest rates are likely to rise. Experts are therefore doubtful whether gold prices will keep rising. The US Federal Reserve's hawkish stance, a strong dollar and rising bond yields could be the main hurdles for gold.

On the Multi Commodity Exchange (MCX) in India, gold had risen to Rs 1,76,306 per 10 grams. According to figures up to October 16, gold stood at $4,185 per ounce in the international market, about 25% below its all-time high. On the MCX at the same time, gold was at Rs 1,45,511 per 10 grams, meaning the price in the domestic market was about 17% below its peak. Factors such as the rupee's position and import duty were important in keeping the fall in India smaller than in the international market.

According to Anindya Banerjee, head of commodity research at Kotak Securities, it may be difficult for gold to reach a fresh all-time high this year. To return to a record level in the international market, gold would have to rise about 34% in less than three months. Given the current high interest rates and bond yields, such a rise is not easy. Prices in India will also depend on the rupee's exchange rate and import duty.

In the international market, $4,100 to $4,110 per ounce is seen as an important support level for gold. If the price goes below this level and closes there, the chances of a fall could increase. If the $4,100 support breaks, the next support could be at $4,000 and then at around $3,880 to $3,900. From the current level, this fall would be about 4% to 7%. If international prices fall further, gold in India could drop to Rs 1,43,500 per 10 grams and then to Rs 1,40,000.

According to Dr Renisha Chainani, chief research officer at Augmont, if the US Federal Reserve raises interest rates more than once, gold could fall to $3,800 per ounce in the international market. In the Indian market, the impact could be seen at the level of Rs 1,36,000 to Rs 1,37,000 per 10 grams. She also said a bigger fall than this is unlikely.

Even though prices have fallen, buyers' enthusiasm has not fully faded. In the quarter ended September, a record $31 billion flowed into global gold exchange-traded funds (Gold ETFs). Central banks around the world are also buying gold. They bought 39 tonnes in August, and the pace of buying rose further in September, according to the information provided. In countries like India, demand for physical gold such as jewellery is also important during the festive season.

Three signals are important for the road ahead. The first is the US Federal Reserve's interest rates. The forecast says the chance of no change in rates at the October FOMC meeting is more than 85%. If a rate rise is avoided in October, gold could get relief. But the forecast also puts the chance of a rate rise in December at more than 70%.

The second signal is the yield on government bonds and the dollar. The yield on US 10-year bonds is around 5%. If this yield and the dollar index fall, gold could get support. If the dollar stays strong and the yield rises, the pressure is likely to continue. The third signal is geopolitical tension. Tension between the US and Iran and higher crude oil prices could affect inflation and the market. If uncertainty grows, demand for gold as a safe investment could rise. But if oil pushes inflation up and keeps interest rates high for long, gold's rise could be limited.

For investors, two opposing forces are currently at work in the gold market. Central bank buying and global uncertainty are supporting gold, while high interest rates, a strong dollar and rising bond yields are putting pressure on its prices. Long-term investors should not make hasty decisions based on daily ups and downs. Including gold in a portfolio in a limited and appropriate proportion can help with diversification. However, investing in gold is also not completely free of risk. Short-term traders should be more careful, as prices could swing sharply in the coming period. When deciding to buy or sell, one should consider the latest market prices, one's own financial goals and risk tolerance.