India Ratings and Research (Ind-Ra) has maintained a negative outlook on domestic gold prices for FY16. Ind-Ra believes movements in gold prices will largely depend on the US' interest rate decision. 'In the event of a US rate hike, global gold prices could drop and range between USD 900 per oz-USD 1,050 per oz. As such, the domestic price of gold may decline and range between Rs 20,500 per 10 gm-Rs 24,000 per 10gm from the current levels,' it said.

Central banks on an average in the last six years have been the net buyers of 460 tons gold annually. Central banks in EU, Russia, China and India were the key contributors among the banks raising purchases of gold. Gold is often considered a hedge against an economic uncertainty. Till such time the uncertainty around global growth is reduced, the chances of international gold prices falling below USD 900/ oz corresponding to the pre-2009 levels are remote.

Gold prices and the Dollar Index historically have a negative correlation, but there have been occasional bouts of a positive correlation for a short term. Gold prices may weaken with the expectation of an increase in the US real interest rates. US real interest rates and gold prices have also more or less remained negatively correlated. Post the 2008 financial crisis, a fall in US real interest rates encouraged investments
in the financial structures linked to gold such as gold exchange-traded funds (ETFs).

The response of gold inventory owners to various developments will be among the strongest drivers of gold prices in the short term. The price correction of around 30% observed between September 2012 and June 2013 was driven by a 20% sell-off by volume of the gold held for such purposes. The period coincided with the earliest instances of implicit or explicit forward guidance from US authorities about future interest rate hikes. If the gold price behaviour during September 2012-June 2013 is tentatively used as a benchmark, an increase in US interest rates may cause gold price to fall by 20%-25%.

China and India form close to half of the total world demand for gold and they have been maintaining their pace of purchases around the 2011-2012 levels. China and India however showed some diverging trends in 1Q15; consumer demand in India rose 15% yoy while it declined 8% yoy in China. Investment demand in India however is down to a six-year low. The overall global gold demand during the next 12 to 18 months is likely to grow at a low single-digit rate if global consumption stays weak.

Total known inventory of ETFs had peaked at 2,632 tons in December 2012 and declined around 65% to 1,600 tons in June 2015 (7.9% yoy).