Refreshed concerns about the euro zone have been weighing on gold prices, in particular, Spain, where bond yields have risen recently. Gold prices have now fallen for the fourth day in a row and are resting at around $1,640. While gold rose in 2011 in times of elevated risk aversion, it has since reverted to trading in line with other commodities and against the dollar, which is now the haven of choice.
For the week ending 10th April, CFTC reported that fund managers reduced their net positions across commodities futures and options by 9.3%, the largest decline seen since 20th December. Many speculators have cut their exposure to the gold price and flows of gold in ETP's have pretty much stagnated. Investors remain cautious and may continue to do so until gold decides whether or not it is going to embody its traditional safe haven status or not.
The near-term path of least resistance for gold appears to be lower and a base for gold prices may be forming around $1,600. In order for gold prices to recover an increase in emerging market demand is essential. Euro zone policy makers also need to restore market confidence by laying out a clear path to fiscal union which would help to bolster the Euro.
Jewellers across India ended a 21-day protest on 6 April following assurances by Finance Minister Pranab Mukherjee that the government would consider scrapping a proposal to impose an excise duty on unbranded gold jewellery. So far, however, merchants report that business has not rebounded as expected following the end of the protest. The weak INR has measurably dampened Indian demand. In the last 12 months the cost of 10 grams of gold has increased from cINR22,200 last year to cINR28,600, almost a 30% increase while in US dollar terms gold prices have only increased 8% for the same period.
Sales are expected to pick up over the forthcoming Akshaya Tritiya festival, which is one of the biggest gold buying festivals in the country and commences on the 24th April. The word 'Akshaya' means imperishable or eternal and as such valuables brought on this day are considered to bring success and good fortune. Gold is considered the ultimate symbol of wealth in India and gold demand is expected to reflect this sentiment during the festival.
In order to encourage gold purchases the Indian post office is offering a 6% rebate on gold coins of various denominations during the festival, this should be an attractive investment option for small investors who can buy smaller coins of 0.5-8 grams in weight.
Gold prices are likely to continue to struggle as investors await the outcome of the International Monetary Fund meeting and the US FOMC meeting.
Gold prices may look bearish in the short-term but in the long-term the gold price is expected to reach highs of $1,800 or more. Gold gave up most of its gains for this year when speculations of further monetary easing were wrung out of the market but as currencies continue to be weakened gold; should come back into play as the ultimate safe haven. There are still many factors present in the economy that will see gold prices driven higher; negative real interest rates, inflation/deflation, a strong US Dollar, futures market etc. Many people may still remain cautious at present but ultimately the current lows in gold price are the perfect opportunity to invest in gold before prices reach those predicted by banks.
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