GOLD - Local yet Global

Gold fell on Wednesday morning, trading ahead of the outcome of a US Federal Reserve FOMC meeting and after talks on relieving Greek debt woes faltered.

Spot gold fell $10.48 to $1,655.92-1,656.20 per ounce. The metal touched a five-week high of $1,681.80 per ounce earlier this week before giving up gains. Various factors have been responsible for this movement in prices.

One of the most important factors in bullion prices in recent days was the news released on January 17th   that India would be boosting its import tax on gold by 90 percent and its silver import tax by 100%. The notable import duty rises were aimed at increasing the country’s revenue base by taxing jewelry metals that have historically been very popular as luxury and gift items within the country. Since India (debatably with China) holds the top spot as the largest consumer of precious metals in the world, this import duty increase could significantly slow demand for physical bullion within that key emerging market economy.  Stock prices of Indian jewelers fell in response to the news, and bullion selling pressure emerged due to anticipated weaker demand, which helped soften gold and silver prices
As the world has been talking about, the great economic crisis has played a significant role in the precious metals market.

Genuine reform has not been implemented. This crisis was caused by unprecedented levels of consumer and corporate debt and Wall Street greed. When the crisis happened, government rescued distressed debt by massively increasing its own debt. For example, the Federal Reserve and the European Central Bank are using their balance sheets at about a 30:1 leverage. This is the same sort of leverage that Wall Street banks had recklessly indulged in. When government debt was substituted for corporate and consumer debt, the whole system rolled over into a much more dangerous phase.

In such an unstable market one would look for various protection tools to remain safe and profitable.
One of the primary measures of protection is a healthy cash balance. You have to be in a position where you are able to ride out any crisis and also to take advantage of valuations in case of a crisis. If the crisis is as bad as I think it will be, you will be able to find and acquire assets at generationally low prices.

The other way to protect you is to invest in precious metals. I believe precious metals will do well whether we continue to stagnate or actually see another crisis. I think silver and gold equities will do very well in the long run.

The yellow metal has been a top performing asset since 2001, as portfolio diversification, concern over sovereign risk and rock-bottom interest rates aided to push prices from a low around $250 an ounce in 2001 to a height above $1920 in September 2011.
In 2012 or during the first quarter of the next year, it is likely gold to surpass that level, potentially breaking through $2000 an ounce level.
Once the macro economic backdrop reverts, naturally interest in investment in gold will decline, but this is not expected to happen before the second half of 2012. During the first half a rising dollar and increased risk aversion, will still maintain the yellow metal’s prices at relatively steady levels, despite curbing gains.

Gold is the first truly global asset boom that investors at all levels can participate in. Today investors are savvier and more heavily invested across markets and categories but gold is fundamentally money and all investors and savers can buy it. Local yet global!

Effect of increase in IMPORT DUTY

The 1% increase of import duty on bullions has not had an immediate effect on the market because this increase was off set by a 1.3% appreciation of the INR/USD.
In case there had been or will be a depreciation then we will surely see price and purchase trends changing. Till then we shall wait and watch

Bullions - Views and Reviews

Gold hit a four-week high and broke above a key resistance on Wednesday, defying a stronger dollar, as the festering euro zone debt crisis lured investors to its safety and signs of strong demand from the world's top two consumers also supported.

Gold bullion dealers reported strong demand from India on Wednesday, as the Rupee rallied 1.5% against the Dollar to hit a one month high. The weak Rupee saw record domestic gold prices in India last year, weighing on demand during what is traditionally a strong season for buying gold

Data showing record gold imports to China late last year has reassured investors that physical offtake is underpinning the market. China, the world's number two buyer of the precious metal, is preparing for the Lunar New Year this month, a key gold-buying period.
Gold is seen as a safe haven against many factors, including currency depreciation; sovereign debt default; inflation; economic ills; and even geopolitics. It's even a play on emerging market growth; China and India use the metal as a savings vehicle.

SPOT MARKET gold prices rose to a one-month high of just under 1647 per ounce Wednesday morning – a 5.1% gain for January – before easing back as the Dollar rallied on the currency markets.

Its break to a one-month high of $1,646.90 an ounce has given investors more confidence to buy the metal, especially in light of improved demand in India - where the rupee's rise against the dollar has cut the cost of buying bullion for local consumers - and a sharp rise in Chinese imports.

Silver prices meantime rose to $30.31 per ounce – level with the week’s high and 8.6% up for the month so far – before they too eased back, while stocks and commodities ticked lower and major government bond prices gained.
Platinum group metals extended gains into a third straight day due to concerns on supply disruption in South Africa, as the national grid Eskom warned about extremely tight power supply in January.

Longer term, gold is not strongly correlated with any other asset. In fact, this is what makes the metal so appealing to many investors. For example, while gold has risen in each of the past 11 years, the US Dollar has fallen in only six of the past 11 years. Thus, gold has rallied while the Dollar has risen, and rallied while the Dollar has fallen.

The "BULL" in the BULLIONS

I had mentioned in my earlier article that 2012 seems bearish for bullion. But it happened quite early, where we saw gold and silver plummeting in the year end.

However, it’s been a bullish start to 2012 for gold, as Gold Prices rally swiftly off the lows set late last year. And from here the market looks bullish.

Gold hit a four-week high and broke above a key resistance on Wednesday, defying a stronger dollar, as the festering euro zone debt crisis lured investors to its safety and signs of strong demand from the world's top two consumers also supported.

Gold bullion dealers reported strong demand from India on Wednesday, as the Rupee rallied 1.5% against the Dollar to hit a one month high. The weak Rupee saw record domestic gold prices in India last year, weighing on demand during what is traditionally a strong season for buying gold

Data showing record gold imports to China late last year has reassured investors that physical offtake is underpinning the market. China, the world's number two buyer of the precious metal, is preparing for the Lunar New Year this month, a key gold-buying period.

Gold is seen as a safe haven against many factors, including currency depreciation; sovereign debt default; inflation; economic ills; and even geopolitics. It's even a play on emerging market growth; China and India use the metal as a savings vehicle.

SPOT MARKET gold prices rose to a one-month high of just under 1647 per ounce Wednesday morning – a 5.1% gain for January – before easing back as the Dollar rallied on the currency markets

Its break to a one-month high of $1,646.90 an ounce has given investors more confidence to buy the metal, especially in light of improved demand in India - where the rupee's rise against the dollar has cut the cost of buying bullion for local consumers - and a sharp rise in Chinese imports.

Silver prices meantime rose to $30.31 per ounce – level with the week’s high and 8.6% up for the month so far – before they too eased back, while stocks and commodities ticked lower and major government bond prices gained.

Platinum group metals extended gains into a third straight day due to concerns on supply disruption in South Africa, as the national grid Eskom warned about extremely tight power supply in January.

Longer term, gold is not strongly correlated with any other asset. In fact, this is what makes the metal so appealing to many investors. For example, while gold has risen in each of the past 11 years, the US Dollar has fallen in only six of the past 11 years. Thus, gold has rallied while the Dollar has risen, and rallied while the Dollar has fallen.

GOLD & SILVER - What's next?

I predicted a bearish outlook for gold and silver in 2012 with gold reaching 24k-25k and silver 45k-48k. However, my predicted targets were reached quite early and now since this correction has come about, I personally feel that people who purchased bullions at this point will not regret their decision.

From here on, I have a bullish outlook for bullions.

According to me, year 2012 will be good for commodities (especially gold) as compared to other markets. I feel:

1.      Gold’s bull market seems intact where prices spiked higher in August, then corrected sharply in September, but a rally is underway again. Given the stresses the European monetary system is experiencing, we expect the rally to continue. Few corrections are always expected.

2.      The world has become a scarier place in recent months as the European financial system is under severe test. If it does not hold up, the fallout is likely to be catastrophic.

3.      The situation in Asia also needs a careful monitoring as any deterioration in China’s economy is likely to spook global markets and that might well boost demand for safe-haven investments.

Overall, given the falling confidence in the economic outlook and in governments’ ability to get to grips with the situation, I feel there is a high risk of deflation and in such circumstances investors are likely to turn to cash – this is likely to be bullish for the dollar.

However, because faith in governments has waned with their handling of the crisis, we expect investors will not want to rely solely on paper money and will look to spread their risk by holding Gold as well.

Greater monetarisation of Gold is likely to be bullish for prices

As per the India's gold import report, the demand of Gold has reduced from 959 tonne in 2010 to 878 tonne in 2011. Gold has been and will always be considered a safe haven asset.

The reduction in demand can be accounted for following reasons:

1.      The prices of Gold had reached its peak in the year 2011. It was hard to find buyers at these prices as people expected for a correction.

2.      Across world including India, equity markets had lost ground. A bearish tide was rising. In this scenario, investors were required to clear their margin calls and in turn they became the biggest sellers of Gold.

3.      Other income sources like Real estate market etc, were also hit by the progressive rise in interest rates by the government. In turn Economy is slowing down.

4.      To add to the fire, Indian rupee weakening by around 20% against USD proved that one of the fastest growing economies had to slow down.

5.      One of the current trends that has hit jewellery demand is the increased popularity of investment bars and coins. In Asia, jewellery has always seen as both an investment as well as an adornment.

But with prices moving much faster these days and becoming more volatile and negligible making charges with buyback easy, investment bars and coins have provided a more standard product to trade. Due to this we have seen 100% increase in demand for RSBL coins.

Summing it up, according to me, Gold is a good buy for investors at INR 26,000 to INR 26,200 levels whereas Silver at INR 48000 to 48500 levels.

BULLION OUTLOOK for 2012

It’s been a wild ride for gold this year with the price surge through the first three quarters of the year and then the collapse in Q4.  The sell-off has confounded many analysts and investors who thought gold would serve as the ultimate safe haven in times of uncertainty.  In fact, the opposite has turned out to be the case with the US Dollar becoming the go-to asset in times of safety.

Gold and silver prices changed direction very sharply throughout 2011: despite the sharp gains of gold and silver prices up until September, precious metals prices changed direction during the last quarter of the year and plummeted in a very short period of time; from this drop precious metals didn’t recover throughout the remainder of the year. Silver price declined below its initial price level from the beginning of the year, while gold price ended the year only 12% above its price level from January 3rd 2011.

Spot gold prices soared to a record above $1,900 an ounce in early September, dipped below $1,600 late in the month, rebounded strongly, and then fell below $1,600 again last week. That's a 16 percent decline in three months, although the shiny metal is still up for the year.

Silver has had a very volatile year so far. Prices all but reached the 1980 high. They peaked at $49.81/oz after rallying 88% from the January low. Since then prices have dropped to $26.06/oz, but have now recovered

Factors that resulted in this downfall were; the FMOC’s decision not to add another stimulus plan (QE3) during the second half of the year, CME’s decision to raise margin on gold and silver, The European Debt Crisis which lead to liquidity problems for banks and traders, strengthening of the U.S Dollar, and shift in market sentiments from considering gold a safe haven to a risky asset.

Year-end selling by hedge funds and tight liquidity in European interbank money markets have also contributed to recent price falls.

Concerns about the euro debt crisis have sent investors scrambling to buy dollars as a haven from risk, rather than gold, which has caused the dollar price of gold to fall.

The market seems bearish for both gold and silver. The world economy is recovering at a very slow pace and the liquidity crisis in getting severe. The main reasons why I speculate a down fall is firstly a slow recovery of the U.S Economy. This may curb the rally of bullion prices. Though there are chances that bullion prices may rise (but not by much) if the Fed issues another stimulus plan (QE 3). Secondly if the EU continues to struggle in dealing with the debt crisis, it may also adversely affect gold and silver prices.

One important thing to note is that CME is likely to keep a vigilant eye on the bullion market and may also intervene and raise margins again if there will be a sharp gain in their prices. Not to forget that if the U.S dollar continues to strengthen then gold and silver prices are bound to fall.

In the Indian markets gold is expected to hover around Rs.24,000 - Rs. 25000 per 10 gram and silver around Rs. 45,000 - Rs. 48,000 per kg. Silver and platinum which are mainly used in industries shall also witness a drop due to reduced demand in line with the global slowdown.

Considering the statements mentioned above, I speculate there is a good chance gold and silver prices will perform poorer in 2012 than in 2011. If there will be another stimulus plan or an event that will stir up the markets then there is a small chance that gold and silver prices will perform better in 2012 than in 2011, but not by much.