Even after hitting an all-time high, domestic gold prices are yet to beat returns from the equity market this year. As of Wednesday, the year-to-date returns of domestic gold prices stood at about 13% , just below the 13.5% yielded by the 30-share Sensex. Interestingly, gold prices have given positive returns each year since 2000 even as the annual returns on Sensex turned negative in both 2008 and 2011 by 52% and 25%, respectively.
While the gap in the returns between the two asset classes has diminished in last couple of days, experts believe the current rally in gold is not backed by its typical ?safe haven? characteristic, but by its higher correlation with riskier commodities in the hope of another round of quantitative easing by the US Fed.
Barclays Capital says international prices, currently trading near $1,660 per ounce, have rallied to levels last seen in April 2012, on the back of a strengthening euro and a dovish tone of the August FOMC meeting minutes. ?Although we believe the Fed will refrain from further quantitative easing, gold has priced in an increased likelihood of further action,? says a recent note by Barclays. It is estimated that global physically-backed gold exchange-traded products (ETPs) have witnessed huge inflows
in August. According to Merrill Lynch, for the week ending August 22, net fund flows into gold were $1.4 billion, the largest in any week in the past nine months. September will be a key month for gold prices following Friday?s Jackson Hole symposium and the FOMC meeting due September 13, combined with the peak period for Indian gold consumption.
However, domestic gold ETFs observed an outflow of R123 crore in the seven months to July, show data from industry body Amfi.
?So far, this year gold has moved away from its traditional defensive behaviour and has started to imitate riskier assets. This shift is again highlighted by the recent gains in the gold prices as traders start speculating the likelihood of the next bout of liquidity injection by global central banker,? said Praveen Singh, senior research analyst, Sharekhan Commodities.
If these expectations are not met, gold prices could see a meaningful correction in the near term also as the physical demand remains weak. ?The y-t-d gains of domestic gold prices may once again trade at a significant discount to that of equities in this case, even as a lower value of rupee may continue to avert a sharp fall in the prices,? added Singh.
Not so long ago, the yield gap between these two asset classes was wider with gold prices lagging the Sensex gains by a margin of about 5% on August 21. This is despite an 8% decline in the value of rupee during the period, that compounded the returns on the domestic gold prices, while international spot prices gained about 6.5% in the first eight months of 2012.
Last week, Thompson Reuters GFMS estimated the gold imports to India may fall 26% to 650-750 tonne in 2012 as record high prices following increased import duties affect consumer demand. Earlier in April 2012, the precious metal consultancy said that the more-than-decade-long bull run in gold may come to end in early 2013 if the prices touch new highs. The Mumbai Standard prices of gold hit an all- time high of R30,920 per 10 gm on Monday.