MUMBAI (Commodity Online): Gold has had a wonderful 2011 but its performance in 2012 has been somewhat disappointing in comparison. Gold prices have remained weak due to a combination of weak Asian demand and lack of further monetary easing. Going ahead, an investor has to watch out for the following six factors when trading gold
- US Federal Reserve Policies– The policies from US Fed officials will continue to have a major impact on gold prices. Any indication of further QE or monetary easing will prove supportive for gold while no further monetary easing will turn to be bearish for gold.
- Economic uncertainties especially related to EU debt crisis and US economic recovery to support gold demand in the form of safe haven investment option for long term. However any indications of economic recovery in these countries may take the shine out for gold for short term.
- India and China gold demand may show modest slowdown for short term following Indian rupee volatility, recent rise in Gold import duty in India, monetary policies and China slowdown. However the strong cultural link of these countries with gold will continue to support gold demand growth for long term.
- USDINR Movement: The volatility is the INR has impacted the Indian gold prices to a great extent. The rupee movements prevented the Indian gold prices to move in tandem with the international gold prices move. In future also it is expected that the Indian rupee, if it appreciates, will provide a cushioning affect to Indian gold prices if the international gold prices fall.
- Increasing Gold purchases by the Central Banks indicates paradigm shift in central bank buying interest in gold. The year 2011 marked the highest figure (439.7 MT) of gold purchases by these banks since 1964. As a group, the official sector holds 18% of all above ground stocks of gold. From 1989 to 2007, these banks were net sellers of gold and net official sector sales averaged 400-500 tonnes per year during that period; the trend reversed since 2010 and the purchases increased sharply during 2011.The trend in central bank buying is likely to continue amidst the uncertainty in dealing with the underlying issues both in US and EU.
- BRIC Countries Official holdings to Increase- BRIC countries have gold as only a small percentage of forex reserves compared with developed countries. Maintaining a higher ratio of gold to total reserves creates a more optimal central bank portfolio as gold is uncorrelated with virtually all assets and provides an excellent hedge against US dollar exposures. Like China has only 1.8% of its reserves as gold and India has 10.5% of reserves as gold against 76.7% in US. Hence gold demand from these emerging economies is expected to increase to add more gold to their official portfolios.
Source: Aditya Birla Money report