Considered one of the safest assets,gold will probably become even more appealing to investors this year as its price is likely to come down
Shobhana Chadha
The glitter of the yellow metal could probably continue to lure investors this year too,especially those who are wary of the choppy equity markets.Last year,gold provided a splendid return of 31.1%.However,investors shouldnt be overjoyed seeing the performance of the commodity since its not a true reflection of its worth.In fact,the metal is basking in glory because the rupee is weakening against the dollar.According to data gathered from Bloomberg,the metal delivered returns of only 10.52% last year in dollar terms.
The inflated returns of Indian investors were due to the falling rupee.This is why experts are warning investors not to go overboard with gold.Many believe that the prices of the noble metal are poised for a significant correction.The magnetic appeal of gold remains weak in the near term.
Several factors are at play that can influence gold prices in the coming months.Heres a look at some of them.
A strong dollar
The greenback is regaining its safe haven appeal due to the ongoing economic uncertainty in the Eurozone,and this is likely to have a negative impact on the demand for gold.With caution over European economic status,investors will prefer holding dollar-denominated cash rather than any other financial asset, says.Investors are increasingly losing faith in the future prospects of the euro.According to Bloomberg,the Dollar Index,a measure of the dollar against six major currencies,has surged 6.05% since 28 October 2011.Considering the gravity of the global economic scenario,experts believe that the index will continue to go up.On the other hand,the yellow metal has witnessed a change in course.As investors are moving away from gold,the dollar prices have already fallen by about 16% since the record high of $ 1,900 per ounce on 5 September 2011.The magnitude of the decrease indicates that the asset class is already on the brink of a bear phase.Gold prices may see a consolidation or correction in the first half of 2012.
A slump in real demand
The demand for physical gold is cooling off.According to the third quarter report of the World Gold Council (WGC),global demand for gold jewellery slumped by 10% in the quarter as compared to the previous year.India,which is the worlds largest market for gold jewellery and gold bars and coins,witnessed a corresponding decline of 26% and 18% in tonnage demand in the two segments as compared to last year.Experts are attributing the dampening consumer enthusiasm to heightened volatility in gold price.Real demand is reducing because of the high price of the metal.I hold a very negative view regarding the performance of gold in 2012, says Sandip Sabharwal,CEO,PMS,Prabhudas Lilladher.
Affirms Arindam Ghosh,CEO,Mirae Asset Global Investments: The actual demand for the metal cannot justify its price level. According to him,gold is not a productive asset class,which is why the fund house has not launched a gold fund despite the euphoria over it.
Demand driven by investment
Gold prices are in a bubble.The asset class is dangerously inflated due to speculative positioning, says Ghosh.The WGC report shows that while the overall demand for gold rose by 6% in the third quarter as compared to the previous year,the increase was primarily fuelled by the investment demand.The demand for gold exchange traded funds and similar products rose by 58%.The surge in the price of any commodity cannot be driven by investment and speculative demand alone, says Sabharwal.
Despite this increase,a sharp recovery in gold prices in the fourth quarter was restricted due to poor investor sentiments.In fact,it seems that globally,the investment and speculative demand is beginning to wobble as gold is increasingly being seen as overbought.Many experts are developing a firm view that the rally in the metal will consolidate,if not correct.
A recent report by Bloomberg stated that many hedge fund managers have sold gold in 2011 and speculators in the New York futures have not been bullish on the commodity in the past 31 months.Investor George Soros,who made $1 billion in one day in the currency market,had cut 99% of his holdings in the first quarter of 2011.All these factors will adversely impact the investment demand to a large extent as even this channel was largely driven by the long-term,safe-haven appeal of gold,which has deteriorated in the past few months.
Magnitude of correction
Experts have their own grades of pessimism.I expect gold prices to fall by 20-25 % by the end of the year, says Sabharwal.Ghosh expects an even more severe correction and believes that it is long overdue.The price level of the commodity should come back to the mean price level of the past five-six years, says Ghosh.This would result in a correction of 33-38 % from the current levels.
On the other hand,i have a more moderate estimate.He sees a correction of up to 11% in gold prices in the first six months of 2012 as the prices may touch 25,000 per 10 gm.Thereafter,he expects the prices to rally by about 14-19 % in the remaining half of the year with target price levels of 28,500-29,800 in the domestic market.If the rally continues,the commodity could test the level of 31,800 per 10 gm in the later part of the year
However,he does not rule out the possibility of a drastic correction like the one witnessed by oil prices in 2008.The prices fell from around $150 to about $30 in just six months.If the pressure on gold prices continues,there is a likelihood of global hedge funds and speculators going short on the commodity and prices seeing a massive plunge.However,we hope that some solution will emerge for the European crisis which should help stabilise sentiments by the second half of the year.Currently,gold is performing more like a risky asset than a safe haven.
Should you book profits
If you intend to hold only for three six months,then yes,book profits.But if you plan to stay invested for three-five years,there is no need to worry as the long-term fundamentals of gold remain unchanged.Though gold serves as a hedge against inflation,it should only be used as a diversifying element in the portfolio.Dont rely strictly on current trends.Assets under management data of the past few months shows that investors are allocating larger amounts to gold.This is not an ideal move as it is not the time to enter gold in a big way, says Sabharwal.Those considering gold with a longer time frame in mind should enter the gold market in a staggered manner.A lump-sum investment can be made at around 25,000 levels.
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