Are you still betting on bullions?
We expect gold prices to have a strong floor at USD 1,580/ounce during the first half of 2013 and during the first half of the year we may see a gradual recovery in prices, says Nirmal Bang research report.
March 02, 2013 / 18:55 IST
Precious metals gave decent returns to investors in 2012 in countries where currencies have weakened against the US dollar. And India is no exception to this since the rupee has been under pressure since some time. In 2012, bond yields of troubled countries from the Euro zone shot up dramatically, credit spreads widened sharply and consensus that the Euro zone may break up grew, leading to a massive spike in prices of gold.
Interestingly, except the second quarter of 2012, investment demand, especially from exchange traded funds (ETFs) remained healthy. Owing to fear that the Euro zone may break up, massive monetary debasement by western central bankers - especially by Federal Reserve and European Central Bank, supply concerns in South Africa, continuous buying by central banks and improvement in demand in India during the second half of 2012, gold holdings in Gold ETFs have been rising constantly.In spite of all bullish triggers gold prices registered nominal gains.The most interesting thing is that since the inception of the crisis in 2008 till 2012, investors have preferred to remain invested in bullions due to crisis of confidence. Even when central bankers were flooding the markets with liquidity, industrialists as well as investors preferred to remain invested in safe haven instruments such as gold and US bonds.Investing in gold has not led to economic growth of any country in the last five years.Central banks aim to stimulate economies. However, this will not be achieved if investors keeps buying gold and do not invest in industrial activities, new projects as well as acts that lead to economic growth. Despite quantitative easing program or QE3 in the US and bullish sentiments in the markets, gold prices did not shoot up. In fact, it witnessed a gradual decline with every stronger-than-expected economic report from the US and other developed economies.The demand for gold plummeted in the first quarter of 2012 due to a host of reasons. These include nationwide strike by jewellers against excise duty on unbranded jewellery, double import duty and government rhetoric to cut gold imports. This also makes us believe that any measure by the Reserve Bank of India to curb gold imports can lead to a sharp drop in imports of gold, which can lead to a correction in prices of gold.However, the demand for gold rose in the third quarter on a year-on-year growth rate of 7% and 12% in jewellery and investment, respectively, in spite of record high prices.Due to low inventory of jewellers and recovery in monsoon, Indian gold demand picked up sharply during the third quarter of 2012. Going forward, moving into 2013, we expect overall fabrication demand in the first half of 2013 to remain weak. We expect a 5% drop in global fabrication demand.Outlook on GoldWe expect gold prices to have a strong floor at USD 1,580/ounce during the first half of 2013 and during the first half of the year we may see a gradual recovery in prices. Weakness in dollar, uncertainties in the Euro zone and debt ceiling talks will remain the prime reason for the potential upside in prices of gold. During the second half of the year, gold prices are likely to remain under pressure once developed economies become stable. When markets will start pricing in rate hikes in the United States, during the same time gold prices can enter into a major consolidation phase and gradual distribution shall take place. We don't remain very optimistic on the outlook of the yellow metal.SilverProduction of silver is rising at a rapid pace due to high prices of the precious metal. It is believed that the marginal cost of production of silver for major miners of this metal is between USD 5 and USD 7. And if silver trades above USD 30/ounce, then miners will be encouraged to produce more of it.Mining is a lucrative business and silver mining too is one of the many profitable ventures. We expect new supply of silver to inch up during 2013. But we won't be surprised if silver production moves up by 2-3% in 2013.Demand for silver took a beating after prices of this metal fell sharply in 2011 and 2012. After hitting a high of USD 37.46 in February '12, silver prices made a low of USD 26.11 in June '12. Investors burnt their fingers during the fall in silver prices. Quantitative easing by the US kept hopes alive for silver bulls as before the onset of QE3, silver prices rallied sharply and made a high of USD 35.36/oz. Indian imports of silver for the year 2012 are estimated to be down by 20-25%.Demand for silver from jewellery and industrial sectors was weak in the year 2012. One of the major demand drivers for silver has been the solar industry. A huge demand for this precious metal was expected from the solar industry but due to trade fight and slapping of anti-dumping duty as well as other restrictions by the European Union and the United States, the Chinese solar industry faced severe downturn, resulting into a major glut of solar panels in the country.Outlook on SilverThe silver market is in surplus and new supply is negative from fundamentals point of view but more than fundamentals, looking at the macro economic scenario for the first half of 2013, we find that silver has set a strong floor at USD 28.50/oz . We may see moderate bullish trend in silver prices during the first two quarters of 2013 in spite of bearish fundamentals. The most important key to this upside is robust silver ETF holdings' demand and recovery in the Chinese solar PV industry.Source: Nirmal Bang's Beyond MarketClick here to read the full magazine Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
