Glitter wanes, but gear up to strike gold in six months

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Published: July 24, 2015 12:05:03 AM

WITH the yellow metal long seen as a safe haven and a hedge against inflation, global gold prices surged from $256 per ounce in 2001...

WITH the yellow metal long seen as a safe haven and a hedge against inflation, global gold prices surged from $256 per ounce in 2001 to a high of $1,920 in 2011, a whopping 650% increase in a decade.

Between 2011 and 2013, depreciation of the US dollar and falling short-term real interest rates enhanced the attractiveness of commodities as an alternative asset, pushing gold to record-high real levels. Gold rose in these years when risks from cheap money policies, overheating stocks and property markets, an out of control derivatives market and the shadow banking system started to show up.

Dollar came under a lot of pressure at that time as the US Federal Reserve started aggressive interest rate cuts in 2001 and 2002 in response to the post-dotcom-bubble recession and September 11 attacks, along with rising federal budget and trade deficits.

In 2008, another tragedy struck the US and gold started shining all the more, demonstrating its safe-haven status after the Lehman Brothers went bankrupt. Barely three months later, QE1 was initiated in November 2008 wherein the US Fed spent $100 billion to purchase mortgage-backed securities ($1.7 trillion total) and, in 18 months, gold prices went up by over 50%, indicating that investment had enabled demand.

After the success of QE1, QE2 and QE3 followed in successive years, and the flush of liquidity in the market boosted gold prices once again and the prices touched record high of $1,921.17 an ounce in 2011.

As economic activity across the globe showed signs of improvement, leading to a rally in stock markets, gold prices started to fall due to rising risk appetite. The prices of the metal plunged 28% in 2013 and, again, 1.4% in 2014 after the much-hyped QE3 came to an end. The tapering of monetary stimulus in October 2014 by the Fed pushed dollar to 12-year-high levels, exerting pressure on dollar-denominated commodities.

This year marked a paradigm shift in the safe-haven status of gold. The Greece debt crisis turned the global markets upside down with fears of the Mediterranean nation leaving the euro dominating the major part. But to everyone’s surprise, no substantial gains were seen in the metal. This is so much unlike the peculiar safe-haven character of gold.

Not only this, selling rout in the Chinese markets after its value contracted by more than 30% in just a matter of three weeks after a gain of a whopping 150% in a year could not spur safe-haven buying and prices currently have plunged to five-year low levels.

Gold holdings at the world’s leading gold-backed ETF, SPDR Gold Trust, dropped to 22.098 million ounces, the lowest since August 2008. On top of this, the Fed is likely to increase US borrowing rates this year as chief Janet Yellen in her latest statement was optimistic for further improvement in the labour market and the economy. This would continue to affect gold prices all through 2015 and if a rate hike is done as anticipated, it would push prices of the metal further down.

Since the dollar Index is likely to gain momentum even more in the coming months and safe haven appeal completely done with, gold prices are expected to remain in a downward spiral. So, retail investors should ideally wait for six months to buy at attractive levels of Rs 24,000/23,500 per 10 gm.

Golden Move:

* Between 2011 and 2013, depreciation of the US dollar and falling short-term real interest rates enhanced the attractiveness of commodities as an alternative asset, pushing gold to record-high real levels
* Gold rose these years when risks from cheap money policies, overheating stocks and property markets, an out of control derivatives market and the shadow banking system started to show up

The writer is associate director, Commodities & Currencies, Angel Commodities Broking

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