Supportive factors will propel gold prices higher

We have seen in recent months that, despite a highly supportive macro backdrop, gold has actually struggled to gain substantial upward traction; and has more often than not behaved somewhat like a risky asset rather than as a haven investment asset that investors usually flock to.

One must hasten to add that while the yellow metal’s haven status is reasonably intact or not diluted, it is also equally true that weaker physical market and strength of the US dollar have combined to cap the upside for some time.

In the last several days, gold prices have actually edged higher – well above $1,700 an ounce – but that is primarily because of recent dollar weakness. Physical market support is still far from robust and is expected to be so at the current levels perceived to be high.

For instance, in rupee terms, gold has become rather expensive for retail consumers in India. This is surely impacting physical demand. If anything, scrap supplies have increased in response to high prices.

EXPECTING UPSURGE

But beyond the short-term weakness, a benign combination of medium-term macro environment, flow of investments and even fundamentals are positive for an upsurge in gold prices.

Most, interestingly, gold has received admirable support from central bank purchases. The official sector has been a net buyer.

Central banks of several countries have been buying the precious metal in varying quantities as part of asset diversification. Russia, South Korea, Kazakhstan and Bolivia to name a few purchased gold recently.

The World Gold Council’s Gold Demand Trends report for the third quarter highlighted net purchases of 148.4 tonnes from the official sector. Over the first three quarters of the year, net demand from official sector is estimated at close to 350 tonnes.

On the other hand, within the ECB, the appetite for gold sales is subdued.

A close look at recent developments provides considerable encouragement for the gold bulls. There is renewed optimism about positive news emanating from Europe in the weeks ahead.

The market expects that EU leaders will commit to faster fiscal consolidation. Closer in time, Thursday’s ECB meeting and the conclusion of EU summit on Friday may provide a clear direction.

China’s reversal of the monetary stance is another booster to liquidity. Further cuts in reserve ratio are most likely in the coming months.

As for investor interest, ETP holdings are currently at well over 2,270 tonnes with inflows steadily rising. Estimates suggest November inflows were nearly 66 tonnes and were strongest since July. Inflows for the year to date are estimated at 141 tonnes. Gold coin sales, although slowing, are still at healthy levels according to US Mint data.

Clearly, there is a tug-of-war out there in the marketplace with macroeconomic uncertainties and official sector net purchases boosting the sentiment towards gold, while attitude towards risk (aversion) and primacy of cash appear to have an edge in the short-term.

Finally, investor interest is the key. If the dollar weakens and an inflationary environment starts to build, gold is sure to once again find favour and gain upward traction.

The next big target of $2,000/oz is not beyond reach; but the road to that target is sure to be bumpier than most can imagine. Savvy investors can benefit from the emerging gold market dynamics. - thehindubusinessline.com

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Posted by admin on Dec 6 2011. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry