Gold Loses its Glitter

Last fortnight gold reached $1796.5- an 11 month high; following comments by ECB president Mario Draghi that more bailouts maybe approaching. He stated that “euro” is irreversible and that the bank was equipped to purchase the bonds of indebted countries.
Positive jobs figures, which raised hopes that Federal Reserve intervention through a third round of quantitative easing (QE3) will be short-lived, have boosted the US currency, while the euro has been under pressure from news that Spain may resist asking Brussels for a bailout. 

However last week, gold was moving on a slightly lower side- at around $1765 on Thursday morning. A stern warning by the IMF on global economic growth and a slow development of the Chinese economy resulted in this downfall.

On Monday, Gold was down 1.2% at 1733$ per ounce. This yellow metal hit a one week low following news from Euro Zone officials that Spain could ask for financial aid from the bloc.

Heavy fund liquidation and technical selling also pressured gold as data showed U.S. retail sales rose in September after Friday's strong consumer sentiment data. Bullion could see more weakness as investors feared the Fed might curb its stimulus due
to a brighter economic outlook

Gold rose to a 2012 high of $1,795.69 an ounce earlier this month. However, several subsequent rallies to break above $1,800 an ounce had failed and were met by heavy technical selling.

Also weighing on gold was data showing Chinese inflation was subdued in September while exports had rebounded at nearly twice the rate expected, dampening expectations for easing measures in the world's second largest economy.

This week the main topics of discussion are- revised German and French CPI data, Italian Bond sales results, US Q3 earnings and the LME week.

The Italian Bond Sale Results May Spark Euro zone Crisis Fears if Yields Rise. The European Union sovereign debt crisis and specifically the countries of Greece and Spain remain a major worry for traders and investor

LME week is to be held in London whereby the London Metal Exchange holds a series of events and meetings. Moreover, the US dollar index and crude oil prices will have a significant effect on silver and gold prices.

With little practical value, and most supply tied up in central bank vaults, gold is the most speculative commodity of all.

Nonetheless Gold, which is seen an alternative to currency, say investors, has the capacity to drive into tens and thousands of dollars. That’s the kind of appeal gold has.

Oh my GOLD!

Reasons for price rise in Gold

Rise in gold prices can be attributed to various reasons - global crisis, economic growth data from various countries, rising unrest in Syria etc. Gold prices fluctuate on a weekly basis due to data released from various countries which directly affect bullion prices.

Moreover, when the world is under turmoil, everyone wants to be on the safer side and there is no better option than gold which has always proved to be a safe haven asset and has given highest returns compared to other assets in its class. This heavy buying has also been cited as one of the reasons in increase in gold prices.

But in relation to the international prices, the domestic prices of gold have comparatively surged much higher. This is due to the depreciation of the rupee against the dollar.

Falling rupee along with increased duties has peaked gold towards its life time high.

The demand supply gap

As the gold demand/supply gap widens against supply, central banks can help fill the widening supply gap with easy-rate gold leasing to keep the market price of gold from rising too fast, or in a reverse scenario of an imbalanced gap against demand, to raise gold leasing rates to slow flow of gold into the market to keep the market price of gold from falling too fast.

Explanation- Demand for gold is majorly categorized into 3 sections - industrial demand , investment demand and demand for Jewelery. Supply of gold comes from mine production, recycled gold and central banks. Of these, central banks play an important role in filling up the demand supply gap for gold. Rise of any commodity is decided in the basis of its demand vs supply. When the demand for gold is much higher than its supply then the central banks offers gold at easy lending rates in order to increase its supply in the market and fill up the imbalanced gap against demand.

And in a reverse scenario, it can increase the lending rates of gold in order to curb its supply and thus prevent the prices from falling further.

Why people buy in spite of hike in prices?

If we see the Indian markets, gold is a part of its culture. Here the basic mentality of an Indian is that invest your money in GOLD FIRST....other things can wait. And more so, it's an age old tradition of buying gold on auspicious occasions like Akshaya Tritiya, Dhanteras and Diwali. Any marriage in India is incomplete without the purchase of gold- be it any form- jewellery, coins, bars etc.

Moreover, keeping the price movements in mind, many believe that prices of gold will reach new heights. Keeping this hike in mind the find it wise t buy gold even if it's at its life time high.

Region wise demand of gold

As per the World Gold Council, last year was a milestone year for gold as global demand for the yellow metal grew 0.4% to 4,067.1 tons at an estimated value of $205.5 billion -- the highest tonnage level with a value exceeding $200 billion since 1997. The increase was mainly propelled by the investment sector, particularly in India, China and Europe.

In the first quarter of fiscal 2012, gold demand was at 1097.6 tons, a 5% year over year decline. Increase in investment demand was offset by declines in demand for jewelry and in the technology sectors, due to higher prices. Central banks continued to be purchasers of gold, accounting for around 7% of total gold demand, at 80.8 tons.

However, in absolute terms, gold demand in the quarter was valued at $59.7 billion, a 16% jump compared with the first quarter of fiscal 2011. Average gold price in the first quarter stood at $1,690.57. This was 22% above the prior fiscal's quarter. In value terms, all the sectors of gold demand posted growth, barring physical bars and the official sector.

Investment demand posted robust growth in the quarter, particularly led by ETFs and similar products. Gold demand in the technology sector was at 107.7 tons, a 7% decline year-over-year due to higher gold prices, weak consumer demand, higher inventories and the uncertainty in Europe.

Jewelry demand dipped 6% to 519.8 tons due to higher price levels. The 22% higher quarterly average price suggests that jewelry demand is not directly related to price. Value of jewelry demand grew 14% to a record $28.3 billion. China, Russia and Egypt recorded growth, while weakness was witnessed in India, a number of Middle Eastern markets and in Europe.

Jewelry demand in India, otherwise a major consumer of gold, was down 19% and investment demand declined 46%. This was mainly due to a sharp decline in the rupee, which led to higher local prices, rise in import taxes on gold and imposition of excise duty on jewelry in that country. However the excise duty was later withdrawn by the government. Gold in India is currently at an all-time high in rupee terms.