The increase in risk appetite around the world has taken the shine off gold. The precious metal has taken a 10% tumble over the past six months even as equities are rallying in the developed markets. This is a break from the correlation seen between gold and equities in the aftermath of the North Atlantic financial crisis. Then the two asset classes, along with other commodities, moved in lock-step, as central bank liquidity flowed through the financial markets.
Clearly, falling demand is a reason for the current decline in gold prices. According to the World Gold Council, demand for the yellow metal declined by 4% in 2012. That’s because the two largest subcategories of demand witnessed a decline.
As India continues to struggle with a high current account deficit and tried to curb the imports of the precious metal, jewellery demand also fell 3% in 2012, the council said. Secondly, investment demand—the main reason for the rise in gold prices over the past five years—is declining. The council puts it at a 3% fall for 2012, but other evidence suggests this continues unabated. The holdings of SPDR Gold Trust, the world’s largest gold exchange-traded fund (ETF), declined for 11 consecutive trading sessions till 6 March, Reuters reported.
The Financial Times reported that gold ETFs shed 140 tonnes, about 5.5% of their total holdings, since the beginning of this year.
Investors are moving assets out of defensive sectors. Data from economies around the world, and particularly the US, suggest a nascent recovery. Economic growth is typically heralded by a boom in equities, such as the one now. During such times, investors look to hold gold as a hedge against inflation. But those concerns have receded for the time being, especially with the so-called sequester cuts in the US. Sure, investors are watching whether central banks in the UK and the European Union will further open their monetary taps.
But, as Barclays Bank Plc analysts wrote in an 18 February note, “Increased liquidity no longer appears supportive for gold, while better-than-expected macro data and outperformance of alternative assets have weighed upon gold.” Thus, gold seems to have reverted to its traditional status as a safe haven asset. As long as the economic indicators show an improvement, gold might be left in the cold.