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Sep 03, 2012, 04.26 PM IST
Ventura Commodities has come out with its special report on Gold. According to the research firm, demand for gold jewellery in India is expected to be lower than usual this year because the price of gold in Indian rupees has moved sharply higher.
The outlook for gold remains positive for the last quarter of 2012 and it is expected that it will continue it's bull run of the year 2011 intact.
It's important to understand the fundamental reasons for owning gold, and those reasons have not changed. The US government embarked on a decades-long spending spree of historic proportions. Gold gained as much as 15% earlier this year to hit USD1,790 an ounce after the Fed said in January it would keep interest rates near zero until at least late 2014 and indicated that it could introduce a fresh round of asset-purchases.
However, prices have lost almost 7% since late February, as the Fed failed to deliver more easing and amid concerns over the euro zone’s deepening debt crisis, which has fueled demand for the precious metal's hedge, the greenback.
Gold prices have rallied in recent weeks, climbing nearly 6% since August 20, amid growing hopes policymakers in the U.S., Europe and China will introduce fresh easing measures to prop up their respective economies.
FACTORS DRIVING GOLD PRICES:
• Bullish factor for gold will be judged by the degree of activities of Central Bankers in their balance sheets. If the U.S. Federal Reserve makes a move to inject more liquidity at some point through another quantitative easing program, that will boost gold prices.
• Inflation in emerging markets is the second key bullish factor for the yellow metal.
• Traditionally, advances in gold during its period of seasonal strength is attributed to precious metal fabricators in India who purchase bullion to make into jewellery for the Indian wedding season that starts in late October. India is the second-biggest consumer of gold jewellery in the world behind China.
• However, demand for gold jewellery in India is expected to be lower than usual this year because the price of gold in Indian rupees has moved sharply higher. Indian rupees recently fell to an all-time low relative to the U.S. dollar. The cost of gold jewellery in India has skyrocketed with the price of gold.
• Despite reduced demand for gold in India, prospects for the seasonal trade this year are higher than average. Demand for gold is increasing. Chinese consumer purchases of jewellery continue to increase.
• Of greater importance, central banks including Russia, China and India are rumoured to be significant buyers. China continues to take action to diversify its reserves outside of U.S. dollar investments by adding to its gold holdings. China and India are rumoured to be buyers of gold for use in a gold-for-oil arrangement with Iran.
• On the supply side, production from China, the world’s largest gold producer, is believed to be declining as older mines reduce production. Meanwhile, investor demand is increasing due to concerns that central banks are trying to stimulate their economies by essentially printing more money.
THE INDIAN SCENARIO
• Another factor that is working in favour of the precious metal is the persistent weakness in the Indian currency. Gold, which was quoting at $1,621 per ounce on August 1, 2011, was priced at $1,670per ounce on June 8, a gain of 3%. But, if you look at the rupee price of gold during this period, the price has moved from Rs 23,150 to Rs 31070 per 10 gram, a gain of 34%.
• This gain is explained by the 26.19% fall in the rupee against the dollar in the same period. The rupee fell from Rs 44.07 per USD to Rs 55.62. The surge in gold prices in rupee term is an outcome of the rupee's depreciation than any increase in demand for the yellow metal. "If gold prices remain firm, demand for gold from India should go down. At the same time, strong gold prices should increase the supply of scrap gold, thereby influencing gold prices downwards.
• Quantitative easing by developed nations typically increases risk appetite of global investors. Carry trade - where investors borrow at a low interest rate in one country and invest for a higher rate of return in another -picks up. Given the attractive equity valuations, the Indian markets may see inflow of funds.
• This will increase the demand for the rupee against the US dollar. A strong rupee may curb the rupee prices when compared with the dollar prices. Quantitative easing, thus, will have a balancing effect on gold prices - while on the one hand it may push up the dollar prices of the precious metal, on the other, it may reduce the rupee prices as rupee strengthens.
FORECAST & CONCLUSION: Gold is likely to reward investors in 2012 as it did in 2011. Hence we expect the price will very likely rise above $1900 level by year-end 2012 .
This would be a gain of 21% percent from last year's closing price. And, with the right confluence of events, gold could quite possibly rise to $2200 by first quarter of 2013.
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To read the full report click here
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