Is Gold Changing Its Personality

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For the week, gold prices have gained about 1 percent. The precious metal touched a weekly high of $1,626. /oz and closed at$1,619./oz on Friday.

Holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange traded fund, increased by 0.26 percent and stood at 1258.15 tonnes on August 10, 2012 as against 1254.94 tonnes in week ended 3rd August 2012.

Anticipation of further stimulus measures from the central bankers of the world observing weak economic data from the major economies of the world supported upside in the prices.

Weak economic data from China restricted sharp rise in the prices.  Also, strength in the DX capped sharp gains in the last week. 

 While we all have known that one of the major factors that is supportive for gold demand is the rise in inflation, it is another concern for gold enthusiasts in the current market as the risk of deflation is now haunting the global financial markets.

 Be it China or the Euro Zone, markets are now believing that the next issue that could bring down the sheen of gold will be the decline deflationary factor. The International Monetary Fund (IMF) has indicated that there is a sizeable risk that few eurozone countries could witness a decline in prices. This news was followed by action by the European Central Bank (ECB), which pumped money into the region by purchasing huge volume of government bonds. In order to avoid a situation of falling prices, central bankers globally could be seen adding stimulus in order to relieve the situation. 

But so far, the activity on the central bank front has been with a very cautious tone and this could be a negative factor for gold prices in the short-term. The only aspect that can lead to a reversal in gold prices is further announcement of quantitative easing by the Federal Reserve.

Considering the changing consumer sentiments towards gold, one can call the current scenario a state of identity crisis for the commodity. Falling in no particular category, it has lost its charm. Inflation hedge– not for the time being, safe-haven asset – again not currently due to rising volatility and traditional form of investment – not anymore due to availability of newer investment avenues in the Indian financial markets.

Another reason for the lack of direction in Gold prices is that the physical market is quiet. Economic hardship across much of the world is reducing demand for luxury items and demand in India has also been hit by the poor monsoon. In addition, the weak Indian rupee that has raised from INR 49against the dollar in February to INR 55 has also boosted domestic Gold prices, which will have further deterred buying. India’s imports in the first seven months of the year are thought to be down 40% compared with the same period in 2011. US Mint Gold coin sales eased to 30,500 oz in July from 60,000 oz in June and total 377,000 oz in the first seven month of the year, compared with one million ounces in the whole of 2011. There are even signs that China’s appetite for Gold has waned – imports of Gold from Hong Kong dropped to 68 tonnes in June from 75 tonnes in May and a record 103 tonnes in April.

A barrier around the $1625.00 mark will remain on account of the continuing economic crisis, which is yet to be resolved. At the start of the crisis, it was given that gold would continue to remain bullish. But with time, the risk potential of the investor has faded due to sharp losses in other asset classes along with increased risk aversion. Traditionally too, Indian investors are not looking at blocking huge amounts of money as there is still no clarity towards the economic situation.

Dealing with these issues in gold, the king of commodity investment, which at one point of time had investors plunging into it, come what may. 

The commodity that finds usage in industrial applications and is also a precious metal has always had to deal with two-sided fundamentals. But in the current context, with gold losing its position as a safe haven asset, silver’s performance as a precious metal is limited and its fundamentals are more tuned with the industrial perspective and on the basis of macroeconomic performance. Monthly average silver prices have slipped 11 percent over this year from an average of $30.8/oz in January’12 to $27.4/oz in July’12. For 2012, the average marked in July’12 is the lowest in the past six months and shows the falling investor confidence towards the white metal.

Global industrial activity has dragged over the period and risk to the downside in demand for silver like other industrial metals is very high. We foresee these demand concerns to keep a check in upside in silver prices and the overall trend in case of the metal is bearish.  How a slowing global economy can impact demand of industrial metals is clearly seen in the form of correction in holdings of silver in the

IShares Silver Trust. From its peak in April’11, holdings have dropped consistently. There has been no drastic change since the start of the year, indicating a period of sluggishness in one of the most important precious metals. Industrial activity has been hit, thereby raising demand growth concerns for metals used in industrial applications. With downgrading of growth forecasts by the IMF and OEDC, expectations for further industrial growth are not very bullish and this will continue to affect demand for silver in the ETF form as well. 

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About: FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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