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Gold Corner
Gold Overview
Gold prices have corrected lower during the month of January on back of US dollar appreciation. After hitting a high of 1161.5$/Oz *during 11th January, 2010 gold prices stared drifting lower and made a low of 1043.75$/Oz *during the first week of Febuary, 2010. However, after the interim correction gold prices have again started moving northwards and now trades around 1100$/Oz* as inherent weakness in US dollar supports gold prices. Again, China has hiked the CRR for second time in four weeks due to concerns over loan growth rate and property price surge. Such an event is likely to be followed by many and will influence gold price movements.
Global growth indicators are exhibiting a healthy upwards momentum. Activity data are stronger in US, Japan and Emerging markets but weaker in Europe. Inflation numbers are still very soft and that subdues the risk of aggressive tightening. However, concerns over unprecedented fiscal deficits and rising Debt/GDP ratios still remains. Over all entire picture remains ambiguous but investors are thriving over momentum driven returns from traditional asset classes.
The Greece debt is rising and there is a risk of default on its debt repayments. The problem of Greece’s debt has raised serious concerns and has the potential to destabilize Euro and hence has triggered broad based risk aversion. US dollar, Japanese Yen and Gold generally tend to benefit as investors become risk averse and commodity currency tends to underperform. Data indicates that investors are reducing the net long Australian and Canadian dollar speculative positions against US dollar. They are also adding net short EUR speculative position against the US dollar. However strength in US dollar can be mainly attributed to weakness in other currencies. Budging twin deficit and Fed balance sheet of US indicates that strength in US dollar is likely to be short lived.
During September, 2009 International Monetary Fund’s (IMF) Executive Board approved to sell one eights of Fund’s total holding amounting to 403.3 tons**. Last year India bought 200 tons followed by Mauritius - 2 ton** and Sri Lanka – 10 tons**. Recently IMF announced that phased sales of remaining gold will be initiated shortly. Psychological impact of proposed sales is putting pressure on gold prices. Gold sales by IMF will be accommodated under the announced ceilings of central banks gold agreement that caps the gold sales to 400** tons annually.
Correction in Gold prices has induced the price sensitive Indian Jewellery investors to spurt up buying. Gold imports are up ~9.8 y-y tons*** during January, 2010 at 35-40 tons***. The net speculative positions across Gold futures contract has gone down a little. The world’s largest gold-backed exchange traded fund, SPDR gold Trust seen a drop in its holding by 21.7**** tons and stands at 1112**** tons during January, 2010 end.
Outlook
Pull back in US dollar has been the most prominent reasons for pulling down in gold prices. US dollar has appreciated against Euro and most of the major currencies mainly due to weakness in other currencies. The focus as of now in on the weakness in Euro due to Greek crisis, However as when the dust settles down focus will shift to weakness in US dollar. In such an environment gold tends to thrive the most on back of its quasi currency status as there are no strong alternative currencies to US dollar. Many Central banks with highest Forex reserves have reinstated this fact by increasing their gold reserves.
Higher inflation expectation will be a major factor to push gold prices higher. Though many expect regulators to tighten aggressively but that cannot happen with hurting growth and political compulsions are likely to force regulators to focus on growth. Hence phased and gradual tightening is more likely a course of action and leaves us in high inflation environment. Again, the quantum of money chasing assets has increased and that leads to asset prices inflation. Gold is seen as a good hedge against inflation and hence it tends to benefit for higher inflation expectation.
Going forward volatility over financial assets is likely to increase and more and more investors are likely to diversify away for traditional assets class. Such moves will benefit gold the most as factors affecting gold market are different from factors affecting other asset classes.
On the demand supply front Jewellery demand is of paramount importance as it has the potential to cap the downside. Prices sensitive Indian Jewellery buyers are waiting on side lines since a long time for price correction and hence any correction will spike up jewellery demand and cap the downside for gold prices. Besides rise in geopolitical uncertainties and acts of terrorism tend to benefit gold – “the safe haven asset.” Long term prudent investors should continue increasing their exposure in gold ETF in a phased manner and any correction in gold prices should be looked at an opportunity to buy.
Source:
*Reuters 18 February, 2010
** www.imf.org, 18 February, 2010.
***Barclays Metal Magnifier, 12 February, 2010
****Reuters, 4 February, 2010
By : Mr. Hiren Chandaria - Fund Manager, Reliance Gold ETF
* Disclaimer
The views expressed herein are the personal views of the Fund Manager. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The Sponsor, The Investment Manager, The Trustee or any of their respective directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. None of The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material.
Sponsor: Reliance Capital Limited Trustee: Reliance Capital Trustee Co. Limited Investment Manager: Reliance Capital Asset Management Limited Statutory Details: The Sponsor, the Trustee and the Investment Manager are incorporated under the Companies Act 1956. The Sponsor is not responsible or liable for any loss resulting from the operation of the Schemes beyond their initial contribution of Rs.1 Lac made towards the setting up of the Mutual Fund and such other accretions and additions to the corpus.
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