Last Updated : 16 November 2012 at 16:15 IST
Highly optimistic Gold bulls,not so favourable markets
Source :Commodity Online
Author :Sreekumar Raghavan
If gold prices are to climb over $2000 levels which it has never done so far then there should be sharp increase in demand or in economic theory terms a shift towards right in the demand curve. In effect this means that gold demand has to go up irrespective of the prices and at each price levels people should start buying more further fuelling a higher demand.
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Gold bulls are still optimistic that the yellow metal will climb $2000/Oz levels and above by this year end, some are more optimistic giving targets of $2500 and above to be achieved some time next year. There is no harm in giving optimistic forecasts, however, one should not forget the ground realities: prime among them is the declining demand to invest in gold because of higher prices.
If gold prices are to climb over $2000 levels which it has never done so far then there should be sharp increase in demand or in economic theory terms a shift towards right in the demand curve (as seen below). In effect this means that gold demand has to go up irrespective of the prices and at each price levels people should start buying more further fuelling a higher demand.
This seems quite unlikely as can be seen from the sharp fall in demand in the first two quarters in 2012 in India on doubling of import tax and additional excise duty on jewellery. In a way it was India Government decision to curb gold consumption that has helped keep global demnad for gold and prices in check. China witnessed a huge demand growth in 2011, according to World Gold Council data but subsequently in the first three quarters of 2012, demand is not so robust.
(As can be seen from the illustrative gold demand chart above, if gold prices are to move beyond $2000, $2500, or more then demand curve needs to shift right which means at any price level more quantities will be demanded by buyers. The rapid economic growth in emerging economies such as India, China, Brazil, Russia may have accounted for growth in demand in recent years but they seem to have plateaued. Apart from some policy announcements related to stimulus measures, in recent times, there has been no major change in investment, jewellery, industrial demand for gold apart from ETFs and Central bank buying)
According to WGC data, global gold demand was 4067.5 tons in 2011 and in the first three quarters this year the demand was 3172 tons falling each quarter on year-on-year basis. By the end of the year total demand may rise above 4000 tons if another 900 odd tons is added to global demand in Q4. One notable factor causing gold prices to rise is the strong demand for exchange traded funds (ETFs).
Recently Denis Gartman of Gartman Newsletter said that too many people are bullish on gold for the wrong reason that US Federal Reserve is turning expansionary but adjusted monetary base ( an indication of how much money Fed owns) is actually moving sideways for the past 14 months and even gone negative. So the entire speculative ride of Gold in recent times was fuelled by a wrong notion that US Fed Reserve was pursuing an expansionary policy.
Gold bulls have encountered surprising setbacks in 2012 including the renowned Barclays Research which had to admit that it went wrong in giving a bullish outlook but others are yet to admit, still sticking to their view and hoping that it will cross $2500 or more in the coming year. If wishes were horses.....
(The author is Chief Commodity Strategist at Commodity Online)
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