Price likely to fall further within a year.
By R Chandrasekaran
CHENNAI: Gold, the precious yellow metal which had a 12 year bull run till 2012, suffered the worst quarter ever in over four and half decades. The chances of retrieving lost ground also look bleak with not much demand coming from the two largest Asian countries, who are also the biggest buyer of gold.
In the last ten days, gold had lost its sheen by close to $200 per ounce and was lower by approximately 28 percent in the current year and settled with a loss of approximately 24 percent during the second quarter, which ends on Sunday. The sharp drop in the June quarter is probably the largest after 1968.
The book closure of the month, quarter, squaring off the positions and persistent liquidation by institutional investors dragged down the yellow metal price to less than $1200 an ounce at one point of time during the trading in Asia during the final week of the quarter.
Investors seem to be cautious and are not ready to pump in their money into the precious metal unlike the reversal of trend witnessed in April. During the month of April, gold dropped over $200 an ounce within two days following the sell off by gold exchange traded funds. However, investors found the sharp fall in price as the right time to buy the yellow metal and indulged in bargain hunting that enabled it to retrieve some lost ground.
But this time, even after seeing gold plummeting $200 per ounce in the last 10 days, investors, especially from China and India, the two biggest gold purchasers, preferred to wait in anticipation of a further fall in the price after the U.S. Federal Reserve indicated scaling down bond buying program. In fact, India has tightened norms for gold imports and increased excise duty on the yellow metal with a view to reduce the foreign exchange outflow.
While the Reserve Bank of India has advised banks to avoid selling gold coins in an effort to reduce its current account deficit, some of the private financial services providers like Reliance Capital have stopped selling gold a few days ago.
In the U.S. too, coin business was much slower in June compared to April. A New Jersey shop owner had reportedly commented that there is no line outside the store unlike in April, after the fall in price of gold.
The primary factors that contributed to gold’s uptick in the recent past are the easy money policy adopted by the U.S. after the financial imbroglio in 2008 that impacted not only its economy but the global economy too. In the absence of alternative securities, investors preferred to take the age-old practice of buying the yellow metal to ward off inflationary threats, as the lower interest rates failed to offset the inflationary pressures on household budgets.
Similarly, higher inflation in China and India also contributed to increased demand from both the Asian countries in the recent years as the uncertainty haunted the equity markets. This apart, some of the Central Banks too resorted to gold buying in the recent past, thus holding the strong price intact for over a decade.
As if these were not enough, S&P had downgraded the U.S. credit sovereign rating by a notch point in August 2011, thus accelerating the shifting of money to the bullion market. The move also lifted the yellow metal price to life time high of $1920.30 in September the same year.
Now that gold is being sold from every corner, the yellow metal is firmly in bear grip. The world’s biggest gold exchange traded fund recorded second largest percentage fall of 1.7 percent in holdings of the SPDR Gold Trust to 16.23 tons on Tuesday, which was their lowest in over a four year period.
Once the Fed stops buying bonds during the second half of the current year, there could be more shift of money from the yellow metal to bond markets. This will likely put additional pressure to hold on to the price. Interestingly, Credit Suisse has kept a price target of $1100 an ounce of gold within a year, which could happen in advance if there is going to be more selling pressure in the coming months.