Spot gold prices started the year on a bullish note as tensions in West Asia and deepening debt worries of the euro zone drove ?safe-haven? demand for the yellow metal. Along with geo-political concerns, a rise in gold demand from China, too, helped gold prices to a higher trajectory.

The other factor that supported an upside in gold prices was weakness in US Dollar Index in the first two months of 2012. However, prices witnessed a selloff through the months of March 2012 till July, due to the global economic slowdown, along with fading hopes for a resolution of debt crisis by European leaders.

Gold started to track the move alongside riskier assets such as equities, shunning its safe-haven characteristic in times of uncertainty. Prices, which gained 6% in the first two months since December 2011, erased gains during the following months and fell 8% from average monthly levels of $1,741 per ounce in February 2012 to $1,592 per ounce in July 2012.

In times of uncertainty, investors flocked to the safe-haven currency US dollar, resulting in demand for the dollar and, thereby, adding strength to it. Strength in dollar, therefore, exerted downside pressure on the dollar-denominated commodities, including gold.

However, initiatives undertaken by euro-zone policymakers, along with accommodative monetary policies by central bankers, particularly European Central Bank and US Fed, from August through September 2012 provided a positive impetus to the global financial markets.

The US Federal Reserve, in September 2012, announced another round of Quantitative Easing (QE3), leading to weakness in dollar index and strength in the euro. Positive sentiments, along with weakness in dollar, led gold prices to regain 9.5% and traded at $1,745 in September 2012.

However, gains in gold prices could not hold ground in October 2012 on renewed concerns over the growth of US and Chinese economies, uncertainty with respect to next Presidency in US and resolution of the US fiscal cliff issue.

Spot gold prices have, thus, witnessed a bearish trend, down by about 3% from the average yearly high made in September 2012. Currently, spot gold is trading around $1,655 per ounce.

On the domestic front, prices of gold were influenced by our macro-economic factors apart from developments in international markets.

Prices started the calendar year on a bearish note due to an additional levy of import duty on gold imports (from 2% to 4%), along with appreciation in the rupee in the earlier months of January and February 2012.

Thereafter, in the later months, depreciation in rupee led gold prices to touch new historical highs of R32,464 per 10 gm in November 2012.

Domestic prices, thus, stand to gain 12% year till date versus 6% for spot gold. High gold prices in recent times also dampened consumer demand of physical gold in 2012.

Gold demand in India stood at 612 tonne in the third quarter 2012 compared with 790 tonne in third quarter 2011.

The growing importance of gold as an asset for diversified portfolio also enhanced the assets under management in Indian gold ETFs to R11,918 crore as on November 30, 2012, against R9,614 crore as on January 31, 2012. The RBI recently proposed gold-linked schemes, which would help people invest in gold without physical possession of the metal.

In 2013, we expect prices of the yellow metal to remain firm as worries over the US fiscal cliff issue might induce safe-haven demand for gold. Even if the US fiscal cliff issue is averted with a probable tax hike and spending cuts to contain fiscal deficit, the modest growth of the US economy may slow down further. This may raise hopes of additional stimulus by the US central bank, leading to a weakness in US dollar.

Although highlighted concerns of euro zone debt have waned, tail risks still remain as to the decisions taken by eurozone policy makers.

Purchases by Central banks to increase gold holdings as a percentage of their total reserve will also be a boost for an upside in gold prices.

Increase in money supply to tackle slowdown in growth has also contributed to debasement of currencies, which causes inflation. Since gold acts as a hedge against inflation, this factor shall also be supportive for gold prices in a long run.

Appreciation in the Indian rupee due to positive sentiments resulting from reforms by the government would restrict sharp gains in domestic markets. Physical demand of gold in India may continue to be timid in the year ahead. We expect gold prices to trade in a range of R29,500 per 10 gm to R32,500 per 10 gm.

The author is associate director, commodities and currencies, Angel Broking