Metal poised to lose out to US equities for the first time since 2004
Gold is heading for a 12th straight year of advance in 2012, scraping through conflicting forecasts of either hitting a record $2,000 an ounce or bursting like a bubble. The 6% gain in the precious metal, however, would be the meanest since 2008.
The metal is also poised to lose out to US equities (the S&P 500 is up nearly 12%) for the first time since 2004, despite increased fears of inflation after two rounds of easing measures by the Federal Reserve. These throw up an interesting question: can the investor count on gold next year as well?
Analysts say a resolution of the so-called US fiscal cliff? $600 billion in tax hikes and spending cuts starting January, which many believe has the potential to push the world’s biggest economy into recession again? holds the key to any worthwhile gains in gold prices.
Moreover, physical demand, especially of jewellery that accounts for 58% of the total gold demand, from top consumers India and China is expected to pick up next year. But scaling the $2,000-an-ounce level seems highly unlikely, they add.
Significantly, the precious metal has dropped by 6% since the Fed announced the third round of quantitative easing (QE3) in September and nearly 2% since the QE4 in December.
In a stark contrast, gold had advanced by 16% and 12% in the first six months of the QE1 in 2008 and the QE2 in 2010. Gold’s retreat since the QE3 shatters notion that improved liquidity and rock-bottom interest rates, which stoke inflationary pressure and help undermine the dollar, create the stage for a bull run in the shining metal, the investors’ traditional hedge against price rise.
Among key commodities, gold has also risen less in 2012, compared with 25.3% in wheat, 16.7% in soybeans, 17.7% in corn, 8.9% in silver. However, it has fared well, compared with a drop of 0.6% in brent crude oil and 8.1% in US crude oil, and a 4.6% gain in copper this year. The Thomson Reuters/Jefferies CRB Index, which tracks the price movement of 19 commodities, has shed 3.5% so far this year. This is, however, hardly any consolation for Indian policymakers, who have been struggling to curb imports of the “idle asset” to control the current account deficit (CAD).
A study by the World Gold Council (WGC) said massive purchases have made Indians the biggest hoarder of the precious metal, with households alone having piled up 20,000 tonnes, worth over $1.1 trillion.
Record gold imports in 2011-12 helped push up the CAD to a record 4.2% of the GDP in the fiscal year through March. The government hopes to reduce the CAD to 3.6% of the GDP in 2012-13, although the deficit rose to 3.9% in the first quarter of this fiscal.
The mid-year economic review has stated: “New gold-backed financial instruments in the form of modified gold deposits and gold accumulation plans, besides gold-linked accounts and pension products linked with the precious metal, are some of the measures being considered to reduce the attraction of a direct investment in bullion and jewellery in the domestic market and check a substantial rise in imports.”
Although India’s gold imports tumbled by 30% to $20.2 billion in the first half of this fiscal, demand got a boost from July, mainly due to the late revival of monsoon and restocking by traders and jewellers ahead of the festive and wedding season. After three successive quarters of decline, gold demand surged 9% to 223.1 tonnes in the three months through September, defying an 11% drop globally.
In value terms, Indian demand shot up by an impressive 27% to R65,373 crore in the September quarter from a year before, thanks to a more than 20% depreciation of the rupee.
At around $1665.50 an ounce in intraday trade on Monday, the global gold price remains 13.3% below the record high of $1,920.30 in September last year. Most banks still forecast gold would scale a peak in 2013, but a lack of a resolution to the European sovereign debt crisis poses a threat as the precious metal has been moving in sync with the euro for quite a while now.
Moreover, some of the reasons cited by forecasters? low interest rates, fears of inflation? as the potential drivers of gold prices in 2013 have failed to propel prices to last year’s record levels. While the impact of the QE3 on gold lasted for less than a week, the announcement of the QE4, in the form of a pledge to purchase longer-term treasuries worth $45 billion a month, couldn’t sustain the metal’s rally for more than a few hours.
Although the average gold price has hit an all-time-high of $1,668 an ounce, it has been way below analysts’ projection at the start of the year of $1,750. However, the WGC has said soaring strength of the Chinese and Indian demand would be key to the metal continuing its bull run into its 13th year.
WGC managing director Marcus Grubb has said Chinese demand will likely jump around 10% in 2013 from around 800 tonnes this year on increasing evidence that the slowdown in the world’s second-largest economy has bottomed out.
Grubb has added that the Indian demand, too, could pick up after an expected 20% fall in 2012 to around 800 tonnes.
