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Recent decline in gold prices were caused by a confluence of factors. Jewellery demand slackened with incessant rise in gold prices. India’s gold imports for 2012 fell by 4.6 per cent from the previous year. Similarly Chinese gold demand in 2012 too fell marginally to 817.5 tonnes from 821.5 tonnes in 2011.
Falling ETF holdings
Bullion holdings of exchange-traded funds (ETFs) have been falling too and are down by 16 per cent in 2013. Investors sold 174 tonnes through ETFs in April, followed by another 13.2 tonnes in May, taking combined holdings to 2,262.7 tonnes valued at about $107.3 billion.
Gold prices continued to move higher until recently on uncertain equity markets and inflationary conditions. This bubble burst when Cyprus hinted at sale of its gold reserves, creating panic about further gold sales by Italy and other Euro Zone economies.
Positive economic data coming from US has boosted the risk appetite of investors making them move out of gold into riskier asset classes. However, over the medium-term, gold’s appeal as an inflation hedge or haven cannot be ignored.
Up from lows
Retail buying in Asian countries due to upcoming festivals and wedding season along with continued bond buying by Federal Reserve and European Central Bank has already helped gold bounce back from recent lows. To consumers looking to buy gold, there are many paper gold options available in the form of Gold Futures, Gold ETFs, E-Gold, along with physical gold in the form of coins. A systematic investment plan is a good way of buying gold, amid volatile prices.
We suggest that investors buy gold at Rs 25,000/ 10gm ($1,290/troy ounce) with further positions to be added at Rs 23,500 ($1,150/troy ounce) levels. Overall gold looks positive for long-term from the above given levels. Factors such as the Euro Zone slowdown and credit problems and sequester in US creating uncertainty, can support the prices. We expect gold prices to near its all-time high by mid next year.
(The author is CEO Emkay Commotrade Ltd. The views are personal.)
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