Gold secular bull has a long way to run
Gold secular bull has a long way to run
Updated on Friday, May 06, 2011, 15:52 Print Email
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The year has seen the soaring of gold prices by over 30 percent, emerging as the hot favourite of the market in its good, bad and ugly phases. Needless to say, gold has held its value in times of inflation to times of stagflation. Now this escalation in the price of gold has not deterred buyers from amassing more and jewellers are gearing up to meet the demand from consumers on Akshaya Tritiya by introducing new offers and schemes.

Anurag Kataria, Vice President of ITI, in an exclusive interview with Ajeet Kumar of Zeebiz.com explains extensively on gold’s current rally, driving factors and price outlook.

What are the factors responsible for gold’s current bullish rush?

From what we have seen in the markets since the beginning of the year, it appears both gold and silver have been given a green light because of the following reasons:

-Investment in Gold Bars and Coins

The gold-backed exchange traded funds (ETFs) that the World Gold Council monitors, experienced net outflows during Q1 2011. However, that does not mean the investment demand in gold has come down as investors preferred to invest more in gold bars and coins rather than in ETF.

Investment activity in China remained high. Physical delivery at the Shanghai Gold Exchange totalled 278.5 tonnes in Q1 2011 compared to 236.6 tonnes delivered during Q4 2010.Gold investment in other parts of Asia remained at healthy levels. In Taiwan, bar imports reached 4.2 tonnes in the first quarter.

-Inflation

Inflation in emerging countries remains elevated. Headline CPI in both China and India exceeded expectations, jumping to +5.4% and +8.98 percent, respectively, in March. Inflationary pressures also heightened in advanced economies. In the US, headline CPI climbed +0.5% m/m in March, in line with market expectations and remained same as February`s increase. From a year ago, inflation rose +2.7% y/y (consensus: +2.6%), up from +2.1% rise in the prior month. In the Euro zone, inflation was revised higher at +2.7% in March, much above the ECB targets. The ECB raised the main refinancing rate at the April Meeting in an attempt to combat inflation. Rising inflation and inflationary expectations send gold rates up.

-US and its budget deficit

Bolstered by rating agency Standard & Poor`s (S&P’s) downgrade on outlook of US debt from stable to negative has pulled gold higher. Standard & Poor`s put US on warning that it has a one-in-three chance of losing its AAA debt rating. Some of the same fears that drove S&P`s move are driving the gold market; the idea that the US will not get its act together to agree budget reform and, in becoming a worse credit, sees the dollar weaken precipitously and supporting gold. Debt problems in the US resurface as President Obama pledged to reduce deficits by USD 4 trillion within 12 years, a plan less aggressive than some other policymakers suggested. Federal Reserve signalled on April 27 that borrowing costs will remain near zero percent for an extended period, paving way for weaker dollar, thereby supporting dollar.

-Geo-political Problems

Unrest in the Middle East and Northern Africa Region (MENA) no more hold headlines in paper but the problems have not come to an end. Problems that began in Egypt are spreading to other Middle East countries. This will support gold.

-China and Gold

China is out to have more gold than America. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals. As of April, China was the sixth-largest official holder of gold, with 1,054.1 tons, according to World Gold Council estimates. "A recent report from the Shanghai Gold Exchange showed that China’s imports reached 209 tons in the first 10 months of the year and strong import demand was reported for late 2010.

In the first two months of 2011 alone, industry experts estimate that imports were between 150 and 200 tons. Indian imports have also rebounded, following a depressed year in 2009.

Worldwide economic plight has suddenly accelerated. The slight downside market action in precious metal prices is short and very brief Gold is under-valued, under-owned and under-appreciated. It is most assuredly not well understood by most investors. At the beginning of the 1970`s when gold was about to undertake its historic move from USD 35 to USD 800 per ounce in the succeeding ten years, the same observations would have been valid. The only difference this time is that the fundamentals for gold are actually better.

P.S. - It`s simple, really. Demand is soaring. Supplies are plummeting. And if you don`t buy gold now, you may not get the chance to later.

How sustainable is gold and silver’s recent rally ?

To an extent, speculative rise seems to be in silver rather than gold. As a low interest rate regime continues, liquidly flow is towards consumption assets i.e. commodities & silver has been a leader into it. But gold has been larger in terms of ROI’s meagre 6 percent compared to silver which is around 39 percent.

There is every reason for gold to outperform for rest of the year, in my opinion, gold should give a return of +5 percent after inflation is adjusted, which can be around 10 percent in real terms. So we are looking at 15 percent ROI in a year’s time & absolute terms. It should be USD 1650+.

Key down side risk should be capped at USD 1482 – USD 1492.

Do you see seasonality in prices of gold as demand appears to be firm, especially during the Apr-June quarter?

Yes, historically for past several years but in recent times, spot markets are also booking their orders in advance for the season.

Is gold future a better investment product compared with physical gold and ETF products?

It is a case sensitive question, as it entirely depends on one’s risk appetite. Leveraged products’ investors should always avoid if they are not educated enough. My answer to ETF & Physical gold will be buying through Spot Exchanges. It gives investor both options of delivery or D-Mat, depending on one’s convenience.

How do the returns from gold futures compare with gold ETF products and physical gold?

On absolute terms (ROI) Futures will always give better returns as the very nature of the product itself is leverage. But it comes with a catch of Mark to Market which can be dampener as it requires proper knowledge of Futures concept itself.

But usually for all these three types investments, underlying the price differential is almost NIL. So it really doesn’t matter and is a matter of choice only.

Will gold face major pull back in future?

Not really, as today’s IMF data for Feb & March 2011 on gold holding from Central Banks of Mexico, Thailand & Russia have added more than 100 MT or USD 6 Billion plus in their reserves.

If this is to go by, I think in gold, we are in for long & secular Bull Run.

What should an average investor do?

Systematic investment plan (SIP) will be an excellent option for an average investor wherein he can buy from ETF, Spot Exchange or physical gold, irrespective of prices in disciplined manner.

According to our study from Jan 2010 till March 2011, if one would have bought one gram gold every month he would have had 11 percent returns on his/her total investment.

Wouldn’t a high price put pressure on demand especially during Akshaya Tritiya?

As I said, it might be a minor reason but there are always retailers who will come for recycling & some addition. Also given the investment options there will be a lot of Paper Purchasing of gold through ETF or Spot Exchanges.

How much higher do you think the price of gold could go?

As suggested earlier I am looking for a Price target of USD 1650+ for this financial year.

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