Widely regarded as the safe heaven asset, gold has lost about 11% in dollar terms in the last six months and its year-on-year returns are now in the negative territory. In the Indian market, gold has lost about 6% since October even as the losses were capped due to depreciation in the Indian rupee against the US dollar (see graph).
Although gold did witness some interest in March owing to the rise in risk in the euro zone, the rally was short-lived and gold prices once again fell below $1,600 per ounce towards the end of the month. Prices are expected to remain weak and volatile even in the near term.
What’s hitting the prices?
The recent weakness in gold prices is a consequence of a number of factors, such as low safe haven demand and better performance of equities. Dow Jones Industrial Average, the most cited stock market index in the US, has gained over 12% since the beginning of this year. Naturally, the rising interest in equities in the largest market in the world reflects that the risk aversions in the global financial market, which was the biggest reason for rise in gold demand and prices, has gone down significantly, if not diminished completely.
Says Ram Pitre, senior vice- president and head, commodity and currency research, Anand Rathi Commodities Ltd: “Rise in equities in markets like the US and Japan has led to withdrawal from gold, at least partially.” Further, gold prices are negatively correlated with the value of the US dollar. As the US dollar has gained against major currencies since the beginning of the year, it has affected gold prices.
The outlook remains muted for gold in the near to medium term, though prices are unlikely to witness a very sharp fall either. “We reiterate that by long-term historical standards, gold remains overvalued both in real terms and relative to other commodities and assets,” noted a recent research report from Credit Suisse Securities Research and Analytics.
Also, if the outlook for global growth improves, it will affect the safe haven demand. Says Lakshmi Iyer, senior vice-president and head (fixed income and products), Kotak Mahindra Asset Management Co. Ltd: “The outlook is not positive for gold.” Iyer also notes that as and when the Federal Reserve decides to reverse its stance, the scenario will again become negative for gold. If the Federal Reserve decides to exit its current stance of injecting cash into the system, it will raise the cost of money and, as a consequence, the opportunity cost of holding gold.
Interestingly, George Soros, one of the most celebrated macro traders of our times, in a recent interview to South China Morning Post, noted: “Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down.”
Central banks continue to buy large quantities. According to data from the World Gold Council, in the year 2012, the gold holding of central banks went up by 17%. In fact, between the year 2000 and 2012, the central bank gold holding went up from $2 trillion to $12 trillion. The idea of central banks to diversify is expected to remain a major factor behind the gold demand.
Mint Money take
The damage for Indian investors in gold was capped because of the weakness in rupee. The Indian rupee is unlikely to appreciate sharply as India is currently running a very high level of current account deficit. However, if gold falls more than the rupee, the impact will be more visible to the Indian investors.
If you invest in gold for diversification, you should not be worried, but if you are over-exposed to gold, it would be advisable to revisit your asset allocation.