The glitter of gold could probably continue to lure investors this year

The glitter of the yellow metal could probably continue to lure investors this year too, especially those who are wary of the choppy equity markets. Last year, gold provided a splendid return of 31.1%. However, investors shouldn’t be overjoyed seeing the performance of the commodity since it’s not a true reflection of its worth. In fact, the metal is basking in glory because the rupee is weakening against the dollar.

According to data gathered from Bloomberg, the metal delivered returns of only 10.52% last year in dollar terms.

The inflated returns of Indian investors were due to the falling rupee. This is why experts are warning investors not to go overboard with gold. Many believe that the prices of the noble metal are poised for a significant correction. “The magnetic appeal of gold remains weak in the near term,” says Naveen Mathur, associate director, commodities and currencies, Angel Broking.

Several factors are at play that can influence gold prices in the coming months. Here’s a look at some of them.

A strong dollar 

The greenback is regaining its safe haven appeal due to the ongoing economic uncertainty in the Eurozone, and this is likely to have a negative impact on the demand for gold. “With caution over European economic status, investors will prefer holding dollar-denominated cash rather than any other financial asset,” says Mathur.

Investors are increasingly losing faith in the future prospects of the euro. According to Bloomberg, the Dollar Index, a measure of the dollar against six major currencies, has surged 6.05% since 28 October 2011. Considering the gravity of the global economic scenario, experts believe that the index will continue to go up. On the other hand, the yellow metal has witnessed a change in course. As investors are moving away from gold, the dollar prices have already fallen by about 16% since the record high of $ 1,900 per ounce on 5 September 2011. The magnitude of the decrease indicates that the asset class is already on the brink of a bear phase. “Gold prices may see a consolidation or correction in the first half of 2012,” says Mathur.

A slump in real demand 

The demand for physical gold is cooling off. According to the third quarter report of the World Gold Council(WGC), global demand for gold jewellery slumped by 10% in the quarter as compared to the previous year. India, which is the world’s largest market for gold jewellery and gold bars and coins, witnessed a corresponding decline of 26% and 18% in tonnage demand in the two segments as compared to last year.

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Posted by admin on Jan 9 2012. 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