KUALA LUMPUR: Domestic gold prices are expected to trend upwards this year due to the strengthening US dollar, according to industry players.

Gold prices — which are primarily denominated in US dollars — usually enjoy an inverse relationship with the greenback. However, the opposite is true for gold prices here.

Public Gold International Bhd executive chairman Datuk Louis Ng forecast gold prices will hit RM180 per gramme from RM155 currently.

“The ringgit has weakened against the US dollar to about RM3.56 now from RM3.20 previously. Local gold prices are already up by 10 sen,” he told The Edge Financial Daily in a phone interview.

Apart from the ringgit, he said emerging market currencies on the whole are depreciating, for instance the ruble, the real and the baht.

This encourages locals to accumulate more gold to hedge against currency depreciation, said Louis.

“So it is good for local traders to protect their exposure by hedging in gold,” he advised.

In an email interview, Poh Kong Holdings Bhd executive chairman and group managing director Datuk Eddie Choon concurred, saying: “Gold prices are pegged in US dollars. As the currency is currently trending up, this means gold prices in ringgit terms also go up.”

On the international front, the precious metal may continue to climb and stay above the US$1,200 (RM4,260) per ounce level. It had shed some value in the past few years despite a sharp rise over the last decade.

“We foresee gold prices to trend between US$1,200 and US$1,300 per ounce,” said Choon.

Louis said gold prices would find strong support at the US$1,180 per ounce level, and that gold prices will be in “positive territory” this year as they have not fallen below that level in the last year and a half.

“We are quite bullish about gold prices this year,” he said.

Tomei Consolidated Bhd group managing director Datuk Ng Yih Pyng believes investors’ portfolio rebalancing has provided support for gold prices.

“Investors, in rebalancing their portfolio, choose to invest in gold to safeguard their investment. This has provided support for gold prices,” he said via email.

“Overall, the world economy is perceived as not doing too well, leading to the fall in most commodity prices,” he said, citing Europe’s economic condition, China’s slowing growth and Japan’s deflation.

Yih Pyng opined that the recent strengthening of the US dollar would only “mildly” impact international gold prices, due to the stronger support for the commodity with the overall slump in the world economy.

“Traditionally, when the US dollar strengthens investors tend to demand the greenback instead of gold, which would soften gold prices. However, as investors shift their portfolio to gold as a safe haven, the impact on the drop in gold prices would be rather mild,” he said.

Further to that, India’s removal of the 80:20 rule in November last year — which mandated that 20% of all gold imports into the country be exported before any new shipments could be brought in — could pull up international gold prices, as it would increase demand and drive up prices.

India is one of the largest markets in the world for gold jewellery. Collectively, the South Asian giant and China make up 56% of global demand for gold.

The trade restriction was initially introduced in July last year to balance India’s ballooning current account deficit. The country is a big importer of two important commodities — gold and crude oil.

“So recently, crude oil prices have plunged which led to a significant reduction of import expenditure of crude oil. This makes India’s current account appear healthier. That is why the Indian government decided to do away with the 80:20 rule. This resulted in gold prices moving upwards,” said Public Gold’s Louis.

While a stronger US dollar may prop up gold prices domestically, there is a risk that the continued decline in crude oil prices may negate the rise as cheaper fuel would translate to lower cost of gold production, which may bring down gold prices, said Louis.

This was already evidenced in the declining prices of other commodities over the last nine months, including palm oil, rubber, copper, and iron.

Domestic demand for gold jewellery, however, will likely be dampened after the implementation of the goods and services tax (GST) on April 1, which would negatively impact the retail sector, notably jewellery outlets, said Choon.

Tomei Consolidated’s Yih Pyng foresees that the weak sentiment will last approximately six to nine months, while Louis believes a nine- to twelve-month period prior to normalisation is more likely.

Both Poh Kong’s Choon and Louis, however, assured that business will return to normal once consumers “get used to having GST in their daily lives”.

Be that as it may, Yih Pyng is expecting a pre-GST rush by consumers to accumulate gold jewellery before the consumption tax kicks in.

As for demand for investment precious metal (IPM), the consensus is that it will remain unaffected given its GST-exempt status.

“We foresee demand for this segment [IPM] to increase as some consumers may switch to buying IPM instead of gold jewellery, which is GST-rated,” he said.

This article first appeared in The Edge Financial Daily, on January 19, 2015.