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.