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Will Gold And Silver Shine Again?

Monday, December 30, 2013

Gold as a commodity underwent a low tide after witnessing more than a decade long winning streak. Perception of investors changed towards gold from a safe-haven investment to a risky asset and the continuing threat of tapering by the Fed pushed gold prices to a low as $1179/oz in June’13. During the same period, Spot Silver prices fell to a low of around $18.18/oz. So can a recovery be expected?

Monetary Policy To Impact Precious Metals
Naveen Mathur
Associate Director, Commodities & Currencies, Angel Commodity Broking

Since stimulus spending in the US accounted for majority of the gains seen in case of gold, what we are seeing now in the commodity’s price trend is the effect of expected withdrawal of the same. The year 2013 has seen structural changes in gold from the fundamental perspective. With the Indian markets witnessing a slow demand growth period even during the traditional festive season, it shows that the change in fundamentals has actually happened globally.

Over the past few years, weakness in the Dollar Index supported sharp gains in gold prices and hence we are now seeing gold prices correct as a result of the fear of the pullback in stimulus spending. From an average of 87.15 in the year 2005, the DX witnessed a decline to average levels of 86.40 in 2006 and the further down to 80.79 in 2007. During these three years, gold prices in dollar terms had jumped from just an annual average of $445/oz in 2005, to $604/oz in 2006 and further up to $697/oz in 2007, showing a negative correlation of 0.8 between the Dollar Index and gold prices and an increase of a whopping 70 % in average gold prices (annual) during the same period.  

Average Spot Gold prices between 2007-2011 have seen a rise of around 160 % and during the same period, the Dollar Index remained below the crucial 80-mark; thus continuing to support upside in gold prices in dollar terms. This year too, while the DX has strengthened about 0.4 % year-to-date and although it tested a high of 84.95 on the 9th July’13, the currency has weakened considerably since and is currently trading around 80.05 levels as the delay in tapering of the quantitative easing program has again added pressure on the DX. Despite this, gold prices haven’t recovered significantly during the second-half of the year as falling ETF holdings of the SPDR Gold Trust indicate deteriorating sentiments towards the precious metals pack.

Gold as a commodity underwent a low tide after witnessing more than a decade long winning streak. Perception of investors changed towards gold from a safe-haven investment to a risky asset and the continuing threat of tapering by the Fed pushed gold prices to a low as $1179/oz in June’13. During the same period, Spot Silver prices fell to a low of around $18.18/oz.

Consumption trends also showed a bearish period for gold as demand fell 21 % during the third-quarter of 2013. In the traditional Indian festival season of Diwali too consumers refrained from making major purchases due to risks over developments on the global economic front. Elevated price levels of gold and a supply shortage in the Indian markets also deterred investors from buying gold. India is set to lose its position of the world’s top consumer of gold to China, the country which has seen an aggressive increase in demand for the yellow metal. Year-to-date, (till 17th Dec’13), gold prices in dollar terms have slipped 26 %, but prices on the domestic futures market have slipped only around 5.5 % as weakness in the Rupee during the year has supported commodity prices in India, thus preventing major losses despite sharp correction in dollar terms. In 2013 (till 17th Dec’13), the Rupee has depreciated around 13 % and commodity prices in India have risen on account of this factor.

For the coming year we expect the low tide in precious metals to continue on account of changing demand-side fundamentals. In 2014, gold and silver are expected to see muted growth on the demand front as expectations of improvement on the global economic front will lead to further deterioration in demand for gold from the safe-haven perspective

Buy Gold On Dips
Prithviraj Kothari
Managing Director, RSBL  

By now everyone would believe that 2013 has been one of the worst years for gold.  This year, gold has dropped 25 %, heading for the first annual drop since 2000. Some investors lost faith in the metal as a store of value amid a rally in U.S. equities to a record and muted inflation. But that doesn’t mean one should stop buying gold or other precious metals. If we take a look at gold’s performance over the past decades we see that gold has given highest returns compared to any other asset in its class. I would advise investors, to have patience and just follow one mantra “Buy on Dips”

It’s quite difficult to predict gold prices. A trade range can though be noted down. There are a lot of factors that are involved in the making and breaking of gold prices. These factors influence the price of gold and gold is directly or indirectly dependent on them. What we assume that in case there is another eruption of a financial crisis or any new geo political crisis, then gold prices may break new highs and continue to rose strongly as a result of the supposed function of gold as a safe haven.

Following will be the key factors that will be responsible for the movement of gold prices in 2014.

US Debt ceiling, QE tapering, Demand for gold from China, Union Budget 2014 (for the domestic market), Mining companies, Interest rates, US economic data

Gold is still at the mercy of the dollar. What this means is, it is as volatile as it is with the Fed’s back-and-forth on the possible taper, gold will continue to play off what the dollar does into 2014.

The average base price for gold in 2014 is expected to be 1375$ an ounce. In the domestic market gold is expected to move in a range of Rs.25, 000 - Rs.33, 000 per 10 gram and the average base price for the same is expected to be around Rs.28, 000.

The average base price for Silver is expected to be around $25.00. The average base price for silver is the domestic market would be somewhere around Rs.45,000 per kg and the trade range for silver is expected to be Rs.37,000- Rs.55,000 per kg.

Bullish Factors To Prevent Further Decline
Jyoti Wadhwani
Associate Economist, CARE Ratings

Gold prices started surging globally as soon as the US Federal Reserve resorted to quantitative easing in the aftermath of the 2008 global recession. Since, then injection of liquidity into the market by purchasing $85 billion worth of government bonds and financial assets every month kept interest rates at a low level. Thus, the bond purchases supported gold prices by weakening the dollar, which trades inversely with the yellow metal. Consequently,   investments in gold have soared globally. The price of gold rose more than 60% since 2008. However, the speculation that U.S Federal Reserve would scale back its stimulus package towards the end of 2013 caused the gold prices to tumble sharply during the year.

Why gold investors fear U.S scaling back its stimulus package?
Tapering of $85 billion a month bond purchasing programme by Federal Reserve is likely to cause yields to rise. When yields go higher commodity market generally suffers. Hence, this would make the non- interest bearing asset like gold less attractive and would lead to a quick disinvestment from the precious metal.

What can be expected next year?
As U.S macroeconomic conditions show signs of improving in terms of falling unemployment rates and rising GDP growth, the Federal Reserve in its recent FOMC meeting on 18th December 2013 announced that it would begin to gradually taper its quantitative easing program from January 2014 onwards. However, the macro–economic indicators although indicate improvement in economic conditions they are still not as strong as they are expected to be. Hence, the Federal Reserve has opted for a modest tapering of the stimulus package by $10billion a month. In addition to this, the committee also stated that it would retain the target interest rates to a near-zero level even if unemployment rate dips below the 6.5% level. Hence, the lower interest rates could continue to support the prices of gold.

Besides, there are various other bullish factors that are set to prevent gold prices from further decline next year. One of these is that that gold has formed a solid base at around $1,200/oz and this coincides with the approximate global average cost of production. This was evident from the fact that as gold slipped below the $1,200 mark in April’13 it bounced very quickly.  Also, the possible breakdown in negotiations over the U.S debt ceiling is likely to raise the possibility of a price rise next year. There is also a possibility of a renewal of the budget crisis in the U.S. that could lead to safe haven buying.

Considering the above possibilities, the international gold prices are not expected to decline further but remain range bound between $1,200/oz to $1,400/oz. On the domestic front; the demand is expected to remain stable as the Indian government has introduced a series of measures to curb gold imports, due to their contribution to the country’s trade deficit.

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