Saturday, 20 April 2013

News Hour: A stronger US may knock off gold from safe-haven pedestal

MUMBAI: Global fund managers have become increasingly bearish on gold with smart investors having found an excuse to dump long gold positions that were accumulated in recent years as a hedge against global risk.

The Cyprus government's announcement to sell gold triggered a global sell-off of the yellow metal, which was already under pressure on signs of recovery in the US economy, and Japanese stocks hitting record highs after the Government of Japanunveiled a $1.4-trillion stimulus to yank the country out of a decade-and-a-half of deflation.

US-based brokerage house, Bank of America Merrill Lynch's metals strategist, Michael Widmer says gold prices could fall another $150/ oz (31.10 gms) to $ 1,200/oz before they stablise. The brokerage firm has removed its $2,000/oz gold price target for 2014, and reduced core asset allocation towards precious metals from bullish to neutral.

Gold prices have plunged over $300/oz over the past eight weeks after having risen for 12 straight years after news surfaced that billionaire investor George Soros halved his holdings in the world's largest gold ETF, SPDR, during the quarter ended December 2012. UBS analyst Dominic Schnider says lack of investment demand due to receding inflationconcerns in the western world, a positive bias towards the dollar and a bull-run in US equitieshave triggered the fall in gold prices.

The brokerage house advises investors to stay away from gold for the time being. Amid this turmoil, one man who got his call right on gold prices was Goldman Sachs' global commodities research head Jeffrey Currie, who issued 'Sell' recommendation on April 10, before gold fell 13% in two sessions through April 15, the biggest decline in 33 years. Currie says gold prices may drop below $1,200/ oz temporarily, and has put the 2014-end gold price target at $1,270/ oz.

Global analysts are building a consensus view that gold might lose its 'safe haven' status as the US economy shows improvement, and several members were in favour of reducing Federal Reserve's asset purchase programme later this year, indicating confidence in the US economy. ICICI Bank's Global Market treasury research Group analyst Rupali Sarkar says gold prices will remain subdued this year, and hover around $1,400 to 1,450/ oz levels in the near term. She has put the 2013-end price target in the $1,330 to $1380/oz range.

Analysts say global investment demand for gold is likely to remain weak with continued trimming of positions in gold-backed exchange traded funds (ETFs). Assets in ETFs decreased to 2,406 metric tonnes on April 12, the lowest since August. They shrank 6.9% in the quarter through March, the biggest fall since 2004. Meanwhile, Indian households have lost over 14 lakh crore of their gold value as prices have crashed nearly 22% to 25,550 from its high of 32,460 in November 2012.

The wealth destruction in gold holdings of Indian households is more than that of total Indian public equity holdings, which is at 11.9 lakh crore, or around 20%, of the total market capitalisation of 61 lakh crore. According to World Gold Council, Indian households have nearly 20,000 tomes of gold, which is currently valued at 52.3 lakh crore, down from November's high of 66.5 lakh crore.


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