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Friday, 13 December 2013

Gold –The Only Time Tested Friend for Investors

Like other asset classes, a gold investment is associated with risks. The price of gold can fluctuate strongly in the short term and also in the long term. Over very long periods of time gold does show a high and – from our perspective – unique stability or wealth preservation. However, such periods can be too long for individual investors. On the other hand, for any risk averse investor an addition of gold contributes to the diversification of his/her investment portfolio. Due to the low correlation of gold with other asset classes, a gold investment reduces the (price) risk for the investor and therefore can reduce potential losses. Professional and courageous investors can speculate on a specific gold price development. For safety-oriented investors it is recommended – also in light of the lack of a regular income or interest from a gold investment a form of insurance. Unlike possibly individual stocks, bonds and other securities, gold will never lose its value completely. Conservative investors should invest only a portion of their total assets in gold. From being inherited as a family’s wealth and possession to becoming a part of one’s portfolio, investment in gold has become diverse. While long-term values associated with gold continue even in today’s era, the diversified investment products have, however, brought in immense opportunities for gold bulls. People have been running towards gold investments since 2001 well supported by aggressive rise in consumption levels in India & China.
As far as investment in gold is concerned, a retail investor can hold gold in the following ways – physical form like coins/bars or jewellery, trades on the futures platform, investments in gold ETFs, the spot market platform, gold savings fund and invest in gold-based equity stocks. With an endless list of investment avenues within gold, the investors are being spoilt for choice. Investment in gold ETFs began in 2004 internationally and this gave investors a new approach towards gold investments. SPDR Gold Trust is the world’s largest gold ETF and its holdings have surged from a mere 8 tonnes at the time of inception in November 2004 to above 900 tonnes currently.
Looking at the price trends in gold, prices started the down trend since August 2012. Gold’s ability to stage further price gains for the remainder of the year will largely depend on developments in the US and its labour market which, while still fragile, has shown improvements in recent months. Indeed, particularly since the Fed has tied its QE mandate towards developments in the unemployment rate, the FOMC meetings and the non-farm payroll releases have almost become price trend determining events. The other factors to be closely watched are festival periods for jewellery purchases (particularly in China and India), recent geopolitical tensions in Syria which could lead to a wider Middle East conflict and the proposed Fed tapering of EQ3 which would lead gold to another downside rally.
In the international market, Global mine production in the first half of 2013 increased by 41 MT or 3 per cent, to total 1,416 MT. Geographically, gains were diverse, with notable increases in China, the Dominican Republic, Canada and Russia. Global scrap supply fell by 14 per cent in the first half of 2013 to an estimated 662 MT chiefly as a result of weaker gold prices. Jewellery fabrication jumped up by 22.8 per cent in the first half, in response to a marked decline in gold prices. Net official sector purchase has dropped by 32.0 per cent to 191 MT in the first half of 2013. Producers’ de-hedging has increased, with some miners taking advantage of lower prices to close positions. World Investment plunged by 28.3 per cent to 517 MT in the first half of 2013, the lowest figure since 2009.
The decline in the confidence of investors in gold was also evidently visible in India. The weakening of Indian rupee also weighed on the gold prices with the government undertaking several steps to curb its imports. In spite of all curbs & restrictions, India continues to be the second largest consumer of physical gold in the world with a share of 28 per cent and is next to China which consumes 33 per cent of the world gold production. The World Gold Council expects demand for the yellow metal to touch 900 to 1000 MT in 2013 against 863 MT in 2012 despite government measures to curb demand in a bid to control current account deficit. The demand in the first half this year was at 567 MT. Indian jewellery fabrication jumped by 25 per cent in the first half of the year to almost 350 MT, as demand for jewellery soared in the second quarter in response to the price retreat. Owing to government measures India's gold imports crashed 95 per cent in August 2013 to just 2.5 MT from a July 2013, easing pressure on policymakers as they struggle to contain the depreciation of the Indian rupee to the US dollar.
From the Indian perspective, gold has always been seen as a saviour in times of financial crisis and the pledge or sale of gold has helped investors reap benefits of investments made earlier. Hence, even though the commodity is under stress in the current scenario, the emotional value towards the metal that has been existent since centuries will not be shaken up completely. Although trends in demand patterns will change and the outlook of investors will evolve, the role of gold as an important investment asset will continue in the years to come. In the years 2011 and 2012 gold has again witnessed a decline in demand as sentiments towards the improvement in the US economy have become positive and additionally, investors are now seeking different investment avenues considering the fact that the nature of price drivers that affect gold prices has become very volatile.
I feel that the inflationary impact would continue to be seen as crude oil prices remain high, thus keeping a positive factor of inflation-hedge demand. While the Federal Reserve is expected to begin tapering of the stimulus, other major economies like Europe and Japan are likely to see a continuation of the stimulus. China too is expected to announce some measures in order to boost economic growth. Such liquidity and boosting actions by central bankers would create an inflationary scenario going forward and thus support demand for the yellow metal. The overall trend in the gold prices is expected to be bullish and the Indian market is likely to trade between 25700 on the lower side and 35200 on the higher side for the year ending 2014.

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