Gold on a bull run

Gold on a bull run

Increase in demand for physical gold among investors.

Commodity markets continue to remain volatile with players groping for direction. In recent weeks, across commodities, investor risk appetite has remained spasmodic. This has followed the flow of economic data, often not very encouraging. An incipient recovery in metals prices (especially steel and copper) led to some optimistic expectations about demand, but it evaporated soon enough.
Crude is currently facing a crisis of confidence. Decline in demand and inventory overhang have affected the sentiment. As prices have declined to $mid-30s a barrel, there is actually panic in the market as to what next. When would supply cuts begin to tighten the market fundamentals remains the key question.
Agricultural markets are moving in their own orbit. Fight for acreage, especially in the US between corn, soyabean and wheat is expected to intensify. Aberrant weather in the Southern Hemisphere and consequent adverse effect of volume of output (mainly soyabean) may provide an upthrust, but will be capped by large inventory and lackadaisical demand growth.
The stimulus packages of various governments are yet to show run their course before they begin to show some result. The US Treasurys plans to fix the financial sector are unclear.

Gold

In a scenario where most commodity markets are in the dumps, with little prospect for a quick price recovery, the eternal favourite of investors, gold has proved to be an exceptional performer. Price of the yellow metal has appreciated steadily, despite reasonably strong dollar and overall weak sentiment in commodity markets.
It has become a truly safe haven asset, if any confirmation was needed. Indeed, the price rise is despite decline in jewellery demand. There has been a dramatic increase in appetite for physical gold among investors.
According to reports, total exchange traded product holdings have risen at their fastest ever rate so far this year, growing by 200 tonnes to almost 1,400 tonnes.
Gold coin sales are also soaring with sales by the US Mint reportedly running at double their levels a year ago.
The uptrend in gold may continue as long as investment buying remains sufficient to offset weakness in jewellery demand.
Even if there occurs a broad commodity market revival with return of risk appetite, gold may not really suffer badly. An upside risk to crude prices, inflation expectations and imminent weakening of the dollar (all of which likely in the second half of the year) would continue to support the yellow metal.
In the short-term, however, in the event safe-haven buying eases for any reason, gold prices could come under pressure especially in a deflationary environment or during bouts of dollar strength.

Resumes bull trend

According to technical analysts at Barclays Capital, gold is resuming its secular bull trend. The break through 931 completes an almost year-long countertrend correction indicating new highs in the weeks and months to come. The March 2008 peak of $1,033 an ounce is the next key level to note.
While the market is likely to struggle at or near this area, there is expectation that it will ultimately break, as the metal continues to shine on an absolute and relative basis. Eight consecutive years of gains, when single-digit annual returns are followed by double-digit annual returns, speak of the strength of the larger, secular bull, as does the positive 2008 out-performance despite a severe decline across the commodity complex, the analysts said.
Measured targets are seen toward the 1,180 area for a gain of approximately 25 per cent, with longer-term targets substantially above there.

Global prices

Rising international prices of gold and weakening Indian rupee have combined to push domestic market prices through the roof. Gold 10 grams reached an unprecedented rate of Rs 14,700. Given that higher prices lead to demand compression in price sensitive markets such as India, physical demand for household consumption (jewellery) is reduced substantially.
Indias gold imports are sure to shrink further as high prices show no sign of abating. Of course, speculators who closely track overseas markets have a field day.