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This Akshay Tritiya... Will The Gold Lure Hold?

Monday, April 23, 2012
By Mayura Shanbaug

Yes! It is Akshay tritiya tomorrow, the second most auspicious day after Dhanteras for the buying of gold. So will there be a buying rush?
Already there is much happening for this precious metal… On domestic front, the government’s plan to impose high duties on gold, aimed at reducing the widening current account deficit prompted gold jewellers to call a 21 days strike, resulting in slowing demand and off take. Internationally, Due to its peculiar nature offering a safe haven appeal, uncertainties surrounding the World Financial markets continue to support prices. Last year concern’s over the Europe’s debt crisis was the key factor driving gold prices to record highs…and this year too, if the latest Thomson Reuters GFMS gold survey for 2012 to be believed, gold prices could overcome the challenging fundamentals and rally towards the $2,000/oz mark later in the year with  investments expected to regain sufficient vigor.

 “What’s going on in Europe is going to be very positive for gold,” says Prithviraj Kothari, President, Bombay Bullion Association (BBA).  “This is because the central bank will be under pressure to print.,” he says. The key factor going forward is going to be all of the money printing in Europe and the United States. “This continues to put a solid floor underneath the gold price, while the longs wait patiently for a significant breakout to the upside,” he adds.

Incidentally, the western world is still grappling with a massive and unrealistic heap of sovereign debt. These high levels of debt, combined with slow economic growth have compelled central banks around the world to 'print' more dollars (and other currencies), to stimulate the economy and inflate away the debt burden with an intentional plan of currency devaluation.

“As far as how this is impacting the price of gold, it broke above the 200 day moving average, so that’s somewhat encouraging,” says Kothari. According to him, this move in gold has taken place while demand from India has been much muted because of the doubling of the import tax.  “So gold is looking fine here,” he adds.

 According to Chirag Mehta, Fund Manager (Commodities), Quantum Asset Management, the global economy is shrouded in various uncertainties. “The long term issues of rising deficits and debts are still in want of some meaningful resolution. Countries such as Iran who has stubbornly carried on with its efforts to develop nuclear plants despite all the talks and sanctions impinged on them; have added to the prevailing uncertainties,” feels.  “In the light of these macro events, gold appears to remain favourable, as an effective portfolio diversifier. Investors should keep allocating to gold in a systematic manner and could use any corrections as an opportunity to buy in,” advices Mehta.

 “There hasn’t been a permanent solution to the crisis and with none of the major or developed economies individually coming forward with a viable solution, so the crisis shall deepen further,” says Pramit Brahmbhatt, CEO, Alpari Financial Services (India).

 Brahmbhatt feels that the deepening of crisis shall work as a catalyst to gold’s prices and it could add further gains. “In near term since the joint efforts of IMF, Germany and France could temporarily postpone the sovereign defaults of Greece, gold’s price eased off from its historical high,” he explains. “Uprising of any future sovereign default risk by any of the PIGS (Portugal, Italy, Germany and Spain) nations will witness gold prices surpassing its historical highs,” he says.

Last month's sharp sell-off set gold into a consolidation mode. During the month, gold prices traversed in a broad range of $100 from USD 1,725 to USD 1,625.

Considering the significant influence that Dollar movements had on gold prices, gold appears to have regained its negative correlation with the US Dollar. Another rather interesting cause of the large swings noticed in gold markets has been "The Bernanke Factor" - the comments and criticism unleashed by Fed Chairman generating market reactions causing volatility in gold and other asset markets as well.

“The volatility in gold prices can be credited to this lack in clarity from policymakers, who despite what they may say, prove in action that they still believe that the economy can only be strengthened through more monetary inflation, further credit expansion and increased government spending,” says Chirag Mehta. 

“Other factors such as the developments in the Euro zone and geopolitical concerns, also influence the value of the dollar and in turn that of gold,” he says.

Though it may appear that gold is moving along with risk assets, it is actually simply following its historical relationship with the dollar says Mehta. 
“The immediate economic concerns have been papered over by the policy makers and therefore before we see a fresh bout of crisis, this movement will likely continue until then,” he explains.

“While the ongoing perturbation in the Euro zone owing to debt contagion spreading to larger economies of Spain and Italy, and health of the US economy would be the imperative factors, investors must watch out for,” cautions CP Krishnan, Whole Time Director of Geojit Comtrade. “Even though, the US economy is showing signs of some revival, persistent worries over job market are still favouring gold’s inflation hedge appeal. Hopes for further monetary policy easing from the Fed in the near term could cushion prices,” he says.

“The short-term caution is, however, advised due to factors such as the Euro zone crisis, which seems to have abated, and lowered expectations that the U.S. Federal Reserve will implement a third round of quantitative easing measures,” says Philip Klapwijk, global head of metals analytics at Thomson Reuters GFMS in the survey report.

"The low $1,600s came as little surprise and it's quite possible we'll see a push even lower, perhaps below $1,550 in the next month or two," he says.

The Domestic Scenario…
The possibility of a decline in the gold consumption of key countries, viz India and China, could also have an adverse impact on gold prices. The Indian Government, in a bid to improve its surging current account deficit, has further raised its customs duty by 2%. Duties and taxes now add more than 5% to the gold price.

The Pricing Trajectory…
 The Bull Run which entered in its eleventh year is assumed to be in the fourth wave of Elliot wave cycle which is expected to complete its corrective wave around $ 1500 levels, from where a fresh upward rally is expected to start which shall have the impetus to surpass the previous historical high and test the $2000 mark says Pramit Brahmbhatt.

“The near term price trend of Gold is in the range of $1600 - $1700 and in medium term the price can drift towards $1500 levels which shall be a good long term buying opportunity with a stop loss below $1300 levels targeting $1900 and $2000 levels,” he says.

“On the lower side gold would be ranging between $1570 and $1530 and on the higher side between $1770 and $1730,” says Kothari.

The GFMS survey report also maintains a bullish outlook for the medium term.  "we could see last September's record high being taken out, and a push on towards $2,000 is definitely on the cards before the year is out, although a clear breach of that mark is arguably a more likely even for the first half of next year.”

projects Philip Klapwijk.
According to C P Krishnan, on a short term basis MCX futures prices are expected to consolidate further in the range of Rs 26000-Rs 29000 per 10 grams. “Weak rupee and solid physical demands could assist positive bias in domestic gold. However, at the same time if prices successfully clear the Rs 30000 mark, such sentiments will take prices much higher later,” he says.   “Prolonged bearishness in the yellow metal is least favoured at this moment, but cannot rule out the possibilities of bears taking control if consistently trade below Rs 24500,” he adds.

 So, in the words of Christian DeHaemer Editor, Wealth Daily, “Now is the time to buy assets with real value.” “Gold, rare earths, and oil will all go up on inflation and the systematic destruction of all major currencies,” says he. 

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