High risk appetite, dollar weakness and a recovery in global market sentiments came in as a supportive factor for major higher-yielding and riskier investments. Although demand for gold usually declines in times of risk appetite, the current scenario is slightly different.
The yellow metal has been performing like a risky asset in the recent times and the decision by the US Federal Reserve to maintain interest rates at historic lows aided further upside in prices. This is because prices in dollar terms take cues from movement in the US Dollar Index (DX), which has remained under pressure since the start of the year.
And the decision by the Federal Reserve to maintain its nearzero interest rate policy regime also added pressure on the currency.
The recent policy of the world’s largest central bank also left doors open for another round of quantitative easing program which could further deteriorate the value of the DX. Year-to-date, it has been seen that despite ongoing economic troubles, the Euro has gained more than 2.5 percent, indicating that positive risk sentiments have supported demand for the Euro.
Performance of gold in the international and domestic markets have been varied as the currency factor has played a dominant role. In case of the Rupee, the currency has appreciated around 7 percent year-to-date and is trading much below the 50-mark.
The end of the weakening trend in the Rupee capped sharp gains in precious metal prices on the domestic front and this trend is expected to continue in the near-term.
Average prices on the Comex increased marginally from $1650/oz in December’11 to $1660/oz in January’12. On the MCX the decline in average gold prices was higher by almost 2 percent as appreciation in the Rupee led to a sharp decline in prices.
In January’12, the yellow metal had slipped below the Rs28,000/10gm level and continues to remain below this mark currently. Shows that after November’11 international gold prices slipped between the $1700/oz mark although in February’12 prices have recovered and are trading above the $1700/oz level currently.
Since the start of the year there has been an increase in crude oil prices and the threat if supply disruptions from Iran is also adding a potential to increase in inflation in the near futures. Inflation-hedge demand has been supportive for gold to a certain extent.
But in the near-term, more than the crude oil factor, we feel that the macroeconomic developments will play a crucial role in determining prices. As far as the scenario in the Euro Zone is concerned, we feel that the debt worries remain intact and even the expected bailout to Greece may not take place in the immediate future, thus keeping the negativity alive.
The safe-haven demand concept may be deteriorating in the near-term as investors remain cautious but the commodity does retain its charm as a long-term investment. With growing risks to one’s portfolio, gold is acting as a safe bet in times of uncertainties.
On a year-to-date basis, holdings in the SPDR Gold Trust increased almost 2 percent to 1278 tonnes currently. In the month of Januray’12 itself, holdings had jumped 1.3 percent and the current month i.e. February’12 continues to witness a rise.
Demand for gold in the form of investments is rising and according to the World Gold Council (WGC), around 13 percent of funds bought globally in 2009-2010 were towards funds like the SPDR.
Investors are focusing on shifting gold purchases towards investments rather than jewelry as sharp increase in prices has made purchases towards jelwery very expensive and by way of ETFs it is easier to stay invested in gold without actually holding the physical metal.
Courtesy: Angel Commodities
Looking for Trading Advisories? Visit tips.commodityonline.com
