Golden Run
Gold has had a “golden“ run in the last decade with its secular growth story still intact and is also seen to strengthen further due
to its unique feature of being a commodity as well as a monetary asset. Notwithstanding the recent drop in prices where gold
plunged from a high of $1,923.70 an ounce to a brief low of $1,522/oz at COMEX, the yellow metal remains firmly established as
the one of the safest asset classes investors can hold on to. On the other hand, prices have tested a new all-time high of
Rs32421/10gms this year in Sept’12 at MCX and are still trading strong. Gold has been consistently generating returns of around
20% every year for last 10 years.
A Definite Asset Class
Gold, considered to be a store of value should be an integral part of any asset allocation today. As an asset class it helps diversify
the portfolio and given it’s low or negative co-relation with other asset classes (stocks, bonds etc.), it serves the purpose of mitigating
risk in the portfolio quite well. Apart from being a Portfolio Diversifier, gold is also considered a perfect hedge against inflation.
The Purchasing power of gold (the real goods and services it can buy) remains same over long periods of time. According to
one study done a few years ago by World Gold Council (WGC), a body that promotes the yellow metal, one ounce of gold would
consistently purchase the same amount of goods and services as it would have done 400 years ago . Gold as an asset class is also
closely linked to the USD and crude oil prices. While it has an inverse relationship–strong negative co-relation with the USD.
Gold is seen as “anti-dollar“, which means that people would be better off not holding bullion if the greenback does well.
In lieu of portfolio diversification, wealth managers recommend allocation of around 15-20% of one’s portfolio in gold as a hedge
against inflation and other asset classes. It acts as a safety net incase our paper money system collapses which would increase
gold’s appeal as an effective portfolio diversifier. Not only is gold an important element of global monetary reserves, it does not
have the inherent counter-party risk that exists with paper financial assets
Demand for Gold
Demand for gold continues to improve. Total amount of gold held in all known ETFs is at record high levels – 82.61 Million
Oz as on 5th Oct, 2012. Central banks are in a continuous process of adding gold to their kitty with recently Philippines and
Russia adding close to 35 tonnes of gold in their reserves. Many other nations, including Kazakhstan and South Korea have
added substantial amount of gold. The world's consumer demand of gold reached to 3478.5 tonnes, increased by 8.1% in
2011 as compared to 2010.
Chart shows that world’s gold investment demand has been continuously rising and this may also continue supporting upside
in prices in long run.
Physical demand in India had been slothful for a long period, but now Jewellery demand seems to be gaining some grip as
gold prices have stabilized to some extent. More than 50 percent of gold goes toward the manufacturing of high-end jewelry,
and the majority of these purchases are made in emerging markets; particularly in India, China and the Middle East. China’s
annual physical demand is expected to surpass that from India any time soon. While these economies could slow
down as a result of a European crisis, the amount of wealth creation over the last decade has been stunning, and the highend
consumers who purchase gold for long term should continue their purchases into 2013 and beyond. Keeping prices
buoyant is also the fact that China’s demand for gold is likely to increase by 1% this year to a record figure of 860 tonnes,
which may lead to China overtaking India as no.1 consumer for the first time on a yearly basis. Again, China’s efforts to
boost liquidity and accelerate infrastructure project sanctions are constructive steps, but they may take a long time to add to
investors’ confidence, if at all it does. The world is heading towards an extended period of weak growth than earlier predicted
and all the above factors are promising for more upside in gold as gold is seen as an alternative asset which performs during
such uncertain times. Again, currency debasement, fear of hyperinflationary environment and record low interest rates
are contributing to higher gold prices.
Healthy physical demand in terms of Bars, Coins, ETFs, and Jewellery may offer support to gold prices. Also, market participants
believe that central banks may continue to amass gold to safeguard against currency debasement and currency volatility
thereby increasing the overall demand for gold.
On the supply side, the strikes, walkouts, violence etc. since last two months, in South Africa are disrupting precious metals’ supply. The strikes started in platinum mines have
disrupted gold supply as well. South Africa supplied close to 7% of global gold in 2011.South Africa's gold output fell 11.1 percent in volume terms in September while total
mineral production dropped 8.3 percent compared with the same month last year. This supply disruption may further support gold price rally
Global political scenario may support gold prices in the medium to long term
The recent changes in the leadership of China and Obama being re-elected as a president of US are two events in the recent days which may support gold rally in the long
term. Obama coming to power again as a president of US means quantitative easing. The ultra-loose monetary policies and currency debasement are set to continue in the
world’s largest economy which is bullish for gold. The change of leadership in China may take action to support economic growth which may boost consumer demand of gold
and silver. The scales of the economic, fiscal and monetary challenges in the U.S. are so high that gold and silver may continue to outperform other asset classes. The repercussion
of QE is inflation which may again drive gold higher. The global economic data suggests that we are on the brink of slowdown, which may spur gold buying further. Eurozone’s
contagion risk remains real as seen in both Spain and Greece which may continue to support safe haven buying in gold. Gold has been one of the key beneficiaries of
monetary easing policies and stimulus measures by central banks around the world. Most of the commodities witnessed a steep run after the announcement of third round of
Quantitative Easing (QE3) by the US Federal Reserve in order to battle high unemployment. Since the launch of QE by Federal reserve, gold has been appreciated tremendously
as depreciation in dollar and risk of inflation drove gold prices higher. The gold in dollar terms appreciated by around 35% in the QE1 phase, 21% in the QE2 phase and appreciated
2.37% till October 2012 since the launch of QE3 on 13th Sept 2012.
Romancing the gold – India
Indians are the most prolific consumers of gold in the world. Traditionally, gold is seen as typical capital preserver
in India. Investors in India look towards God and Gold in times of financial turbulences. Saving rates are estimated
around 30% in India and according to WGC, 10% is believed to be invested in
gold. There is growing domestic interest in gold investment stimulated by high saving and increasing gold investment
products. Inflation is at higher levels in India and the pressure is expected to rise further and gold is a proven
inflation hedge, so investors rush towards gold.The physical buying in Asia is expected to pick up amid start
of the festival season in India with Diwali and wedding season ahead and China again begins to stock up for
Christmas and the Chinese New Year. The festivals of Diwali and Dhanteras are considered very auspicious time
to accumulate gold in India. Overall, the outlook for gold remains positive and the upcoming marriage and festival
season can provide further impetus.
As gold prices kept on rising every single year for the last many years (they are up nearly 6 times in 10 years), annual investments in gold by Indians have gone from $ 0.9 bn (0.2 %
of GDP, 0.7% of Household savings) in FY2003 to $ 36 bn (2% of GDP, 10% of Household savings) in FY12.
Off late, many investors liquidated gold positions to cover losses elsewhere and to improve the performance of their bleeding portfolio as rise in risk aversion forces investors to exit
markets and this drives gold prices lower. However, the fundamental outlook for gold remains extremely bullish and paints a rosy picture for gold bulls.
Prices in last two years have formed a strong ground level at levels of around $1520/oz at COMEX
and is acting as long standing support mark. In recent past, prices treaded significantly higher as they
gave a breakout above $1640/oz, after a third round of quantitative easing was announced by US
Fed and shot up towards $1800/oz at Comex. However, prices were not able to nudge past $1800/oz
and have corrected significantly but prices are firmly supported by 200 DEMA at levels of $1670/oz.
This level also corresponds to 50% Fibonacci retracement of the move from $1525/oz to $1795/oz
and may lead to a retreat in prices. Once prices are able to cross $1800/oz, we are likely to see prices
surpassing even the previous high of $1923.70/oz at COMEX. In MCX too, prices have corrected
from all time high of Rs32421/10gms seen in the month of Sept'12 to levels of Rs30366/10gms seen
in recent days, but this corresponds to a crucial support of 61.8% Fibonacci retracement of the move
from Rs29133/10gm to a move of Rs32421/10gm and would provide cushion to prices. As long as
prices are able to hold above this mark, we may see them heading higher towards Rs32400/10gm
initially and crossover would imply new record highs of around Rs33800/10 gm as well.
Price Outlook
Gold prices have given remarkable returns of 436% in last 10 years. Gold prices have a tendency to bounce back when everyone thinks that the bull Run is over. As long as there is
an environment of global economic uncertainty along with a policy of loose monetary policy adopted by central banks around the world, high inflation regime and increasing investment
demand, it would continue to support upside in gold prices
Gold has had a “golden“ run in the last decade with its secular growth story still intact and is also seen to strengthen further due
to its unique feature of being a commodity as well as a monetary asset. Notwithstanding the recent drop in prices where gold
plunged from a high of $1,923.70 an ounce to a brief low of $1,522/oz at COMEX, the yellow metal remains firmly established as
the one of the safest asset classes investors can hold on to. On the other hand, prices have tested a new all-time high of
Rs32421/10gms this year in Sept’12 at MCX and are still trading strong. Gold has been consistently generating returns of around
20% every year for last 10 years.
A Definite Asset Class
Gold, considered to be a store of value should be an integral part of any asset allocation today. As an asset class it helps diversify
the portfolio and given it’s low or negative co-relation with other asset classes (stocks, bonds etc.), it serves the purpose of mitigating
risk in the portfolio quite well. Apart from being a Portfolio Diversifier, gold is also considered a perfect hedge against inflation.
The Purchasing power of gold (the real goods and services it can buy) remains same over long periods of time. According to
one study done a few years ago by World Gold Council (WGC), a body that promotes the yellow metal, one ounce of gold would
consistently purchase the same amount of goods and services as it would have done 400 years ago . Gold as an asset class is also
closely linked to the USD and crude oil prices. While it has an inverse relationship–strong negative co-relation with the USD.
Gold is seen as “anti-dollar“, which means that people would be better off not holding bullion if the greenback does well.
In lieu of portfolio diversification, wealth managers recommend allocation of around 15-20% of one’s portfolio in gold as a hedge
against inflation and other asset classes. It acts as a safety net incase our paper money system collapses which would increase
gold’s appeal as an effective portfolio diversifier. Not only is gold an important element of global monetary reserves, it does not
have the inherent counter-party risk that exists with paper financial assets
Demand for Gold
Demand for gold continues to improve. Total amount of gold held in all known ETFs is at record high levels – 82.61 Million
Oz as on 5th Oct, 2012. Central banks are in a continuous process of adding gold to their kitty with recently Philippines and
Russia adding close to 35 tonnes of gold in their reserves. Many other nations, including Kazakhstan and South Korea have
added substantial amount of gold. The world's consumer demand of gold reached to 3478.5 tonnes, increased by 8.1% in
2011 as compared to 2010.
Chart shows that world’s gold investment demand has been continuously rising and this may also continue supporting upside
in prices in long run.
Physical demand in India had been slothful for a long period, but now Jewellery demand seems to be gaining some grip as
gold prices have stabilized to some extent. More than 50 percent of gold goes toward the manufacturing of high-end jewelry,
and the majority of these purchases are made in emerging markets; particularly in India, China and the Middle East. China’s
annual physical demand is expected to surpass that from India any time soon. While these economies could slow
down as a result of a European crisis, the amount of wealth creation over the last decade has been stunning, and the highend
consumers who purchase gold for long term should continue their purchases into 2013 and beyond. Keeping prices
buoyant is also the fact that China’s demand for gold is likely to increase by 1% this year to a record figure of 860 tonnes,
which may lead to China overtaking India as no.1 consumer for the first time on a yearly basis. Again, China’s efforts to
boost liquidity and accelerate infrastructure project sanctions are constructive steps, but they may take a long time to add to
investors’ confidence, if at all it does. The world is heading towards an extended period of weak growth than earlier predicted
and all the above factors are promising for more upside in gold as gold is seen as an alternative asset which performs during
such uncertain times. Again, currency debasement, fear of hyperinflationary environment and record low interest rates
are contributing to higher gold prices.
Healthy physical demand in terms of Bars, Coins, ETFs, and Jewellery may offer support to gold prices. Also, market participants
believe that central banks may continue to amass gold to safeguard against currency debasement and currency volatility
thereby increasing the overall demand for gold.
On the supply side, the strikes, walkouts, violence etc. since last two months, in South Africa are disrupting precious metals’ supply. The strikes started in platinum mines have
disrupted gold supply as well. South Africa supplied close to 7% of global gold in 2011.South Africa's gold output fell 11.1 percent in volume terms in September while total
mineral production dropped 8.3 percent compared with the same month last year. This supply disruption may further support gold price rally
Global political scenario may support gold prices in the medium to long term
The recent changes in the leadership of China and Obama being re-elected as a president of US are two events in the recent days which may support gold rally in the long
term. Obama coming to power again as a president of US means quantitative easing. The ultra-loose monetary policies and currency debasement are set to continue in the
world’s largest economy which is bullish for gold. The change of leadership in China may take action to support economic growth which may boost consumer demand of gold
and silver. The scales of the economic, fiscal and monetary challenges in the U.S. are so high that gold and silver may continue to outperform other asset classes. The repercussion
of QE is inflation which may again drive gold higher. The global economic data suggests that we are on the brink of slowdown, which may spur gold buying further. Eurozone’s
contagion risk remains real as seen in both Spain and Greece which may continue to support safe haven buying in gold. Gold has been one of the key beneficiaries of
monetary easing policies and stimulus measures by central banks around the world. Most of the commodities witnessed a steep run after the announcement of third round of
Quantitative Easing (QE3) by the US Federal Reserve in order to battle high unemployment. Since the launch of QE by Federal reserve, gold has been appreciated tremendously
as depreciation in dollar and risk of inflation drove gold prices higher. The gold in dollar terms appreciated by around 35% in the QE1 phase, 21% in the QE2 phase and appreciated
2.37% till October 2012 since the launch of QE3 on 13th Sept 2012.
Romancing the gold – India
Indians are the most prolific consumers of gold in the world. Traditionally, gold is seen as typical capital preserver
in India. Investors in India look towards God and Gold in times of financial turbulences. Saving rates are estimated
around 30% in India and according to WGC, 10% is believed to be invested in
gold. There is growing domestic interest in gold investment stimulated by high saving and increasing gold investment
products. Inflation is at higher levels in India and the pressure is expected to rise further and gold is a proven
inflation hedge, so investors rush towards gold.The physical buying in Asia is expected to pick up amid start
of the festival season in India with Diwali and wedding season ahead and China again begins to stock up for
Christmas and the Chinese New Year. The festivals of Diwali and Dhanteras are considered very auspicious time
to accumulate gold in India. Overall, the outlook for gold remains positive and the upcoming marriage and festival
season can provide further impetus.
As gold prices kept on rising every single year for the last many years (they are up nearly 6 times in 10 years), annual investments in gold by Indians have gone from $ 0.9 bn (0.2 %
of GDP, 0.7% of Household savings) in FY2003 to $ 36 bn (2% of GDP, 10% of Household savings) in FY12.
Off late, many investors liquidated gold positions to cover losses elsewhere and to improve the performance of their bleeding portfolio as rise in risk aversion forces investors to exit
markets and this drives gold prices lower. However, the fundamental outlook for gold remains extremely bullish and paints a rosy picture for gold bulls.
Prices in last two years have formed a strong ground level at levels of around $1520/oz at COMEX
and is acting as long standing support mark. In recent past, prices treaded significantly higher as they
gave a breakout above $1640/oz, after a third round of quantitative easing was announced by US
Fed and shot up towards $1800/oz at Comex. However, prices were not able to nudge past $1800/oz
and have corrected significantly but prices are firmly supported by 200 DEMA at levels of $1670/oz.
This level also corresponds to 50% Fibonacci retracement of the move from $1525/oz to $1795/oz
and may lead to a retreat in prices. Once prices are able to cross $1800/oz, we are likely to see prices
surpassing even the previous high of $1923.70/oz at COMEX. In MCX too, prices have corrected
from all time high of Rs32421/10gms seen in the month of Sept'12 to levels of Rs30366/10gms seen
in recent days, but this corresponds to a crucial support of 61.8% Fibonacci retracement of the move
from Rs29133/10gm to a move of Rs32421/10gm and would provide cushion to prices. As long as
prices are able to hold above this mark, we may see them heading higher towards Rs32400/10gm
initially and crossover would imply new record highs of around Rs33800/10 gm as well.
Price Outlook
Gold prices have given remarkable returns of 436% in last 10 years. Gold prices have a tendency to bounce back when everyone thinks that the bull Run is over. As long as there is
an environment of global economic uncertainty along with a policy of loose monetary policy adopted by central banks around the world, high inflation regime and increasing investment
demand, it would continue to support upside in gold prices
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