11:46 AM
alphaadvisory
A better tone in the U.S. economy despite geopolitical tensions, weak demand from Asia is weighing heavily on gold's appeal as a hedge.
After a 12 year rally, gold prices ended its bull run in 2013, wherein gold prices lost around 28 percent of its value. Bearish investors have been cheering gold's retreat. The popularity of placing bets on lower gold prices has grown throughout the year. The year 2014 seem to be a good year for gold, as prices once again started its bull run and headed towards $1400 mark making an impressive rally of 14 percent by mid March 2014 and then started declining and headed towards $1300 mark. Prices gained by more than 7 percent in the first four months of 2014 appealing gold as an asset class. In the domestic markets, gold prices gained by around 1.2 percent on year till date basis and gained marginally by around half a percent in Q1 of 2014. Gold’s appeal as a safe haven seems to be declining as stocks sitting inside U.S. exchange warehouses have risen to a 10-month high on weakening of physical demand, particularly from Asia. Also, in the retail gold market, buying sentiment among private bullion investors edged down in March. The Gold Investor Index, which measures the balance of customers adding to gold holdings over those reducing them, was down to 53 in March from 53.5 in February. A reading of 50 signals an equal number of net gold buyers and sellers. Demand from China, the biggest consumer of yellow metal also seem to be waning as net gold flows into China from Hong Kong fell to 85.128 tonnes in March 2014 from 112.314 tonnes in February. Banks are reluctant to bring more gold into the country at a time when demand is soft and a weak yuan would force them to take losses on any sales. Prices on the Shanghai Gold Exchange, the platform for all physical gold trades in China, flipped to a discount to spot prices in early March and remained lower than London prices for all of that month. In the last few days, they have been trading either on par or at a very slight premium. This indicates that slowing demand from China the world’s largest consumer of the yellow metal. From Akshaya Tritiya last year, on May 13 till date, gold prices on the MCX is up 7.06 percent (mostly due to weak rupee), while the international markets have declined by around 10 percent in the same time frame as investors have been on a selling mode globally and tough restrictions on import and jewellery businesses have taken the wind out of the sails of the sector. This will continue for this year also as investor’s appetite towards gold as a safe haven has drastically reduced and these will lead to gradual shift of funds from gold to other asset classes like equities exerting downside pressure on gold prices. Outlook Weak physical demand from Asia and continued optimism about US economy are the prime reason for gold prices to be under pressure in the recent weeks. A better tone in the U.S. economy despite geopolitical tensions had recently weighed heavily on gold's appeal as a hedge. A strong economy could mean that the Fed could quicken its path towards a tighter monetary stance. In the immediate-term, support to gold prices will be seen especially as prices in the Indian markets could stabilize before taking a correction further. This is due to the wedding season and the traditional Akshaya Tritiya demand, during which investors and retail consumers in India prefer to make gold purchases (irrespective of the price) due to the auspicious sentiment attached to it. However a note of caution as gold has lost its sheen over the past year on account of waning interest by the ETF investors and investors across the globe are generally in a sell mode.
After a 12 year rally, gold prices ended its bull run in 2013, wherein gold prices lost around 28 percent of its value. Bearish investors have been cheering gold's retreat. The popularity of placing bets on lower gold prices has grown throughout the year. The year 2014 seem to be a good year for gold, as prices once again started its bull run and headed towards $1400 mark making an impressive rally of 14 percent by mid March 2014 and then started declining and headed towards $1300 mark. Prices gained by more than 7 percent in the first four months of 2014 appealing gold as an asset class. In the domestic markets, gold prices gained by around 1.2 percent on year till date basis and gained marginally by around half a percent in Q1 of 2014. Gold’s appeal as a safe haven seems to be declining as stocks sitting inside U.S. exchange warehouses have risen to a 10-month high on weakening of physical demand, particularly from Asia. Also, in the retail gold market, buying sentiment among private bullion investors edged down in March. The Gold Investor Index, which measures the balance of customers adding to gold holdings over those reducing them, was down to 53 in March from 53.5 in February. A reading of 50 signals an equal number of net gold buyers and sellers. Demand from China, the biggest consumer of yellow metal also seem to be waning as net gold flows into China from Hong Kong fell to 85.128 tonnes in March 2014 from 112.314 tonnes in February. Banks are reluctant to bring more gold into the country at a time when demand is soft and a weak yuan would force them to take losses on any sales. Prices on the Shanghai Gold Exchange, the platform for all physical gold trades in China, flipped to a discount to spot prices in early March and remained lower than London prices for all of that month. In the last few days, they have been trading either on par or at a very slight premium. This indicates that slowing demand from China the world’s largest consumer of the yellow metal. From Akshaya Tritiya last year, on May 13 till date, gold prices on the MCX is up 7.06 percent (mostly due to weak rupee), while the international markets have declined by around 10 percent in the same time frame as investors have been on a selling mode globally and tough restrictions on import and jewellery businesses have taken the wind out of the sails of the sector. This will continue for this year also as investor’s appetite towards gold as a safe haven has drastically reduced and these will lead to gradual shift of funds from gold to other asset classes like equities exerting downside pressure on gold prices. Outlook Weak physical demand from Asia and continued optimism about US economy are the prime reason for gold prices to be under pressure in the recent weeks. A better tone in the U.S. economy despite geopolitical tensions had recently weighed heavily on gold's appeal as a hedge. A strong economy could mean that the Fed could quicken its path towards a tighter monetary stance. In the immediate-term, support to gold prices will be seen especially as prices in the Indian markets could stabilize before taking a correction further. This is due to the wedding season and the traditional Akshaya Tritiya demand, during which investors and retail consumers in India prefer to make gold purchases (irrespective of the price) due to the auspicious sentiment attached to it. However a note of caution as gold has lost its sheen over the past year on account of waning interest by the ETF investors and investors across the globe are generally in a sell mode.
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