Why gold may not witness a fast and furious rally?

Written by: Sunil Fernandes
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 Why gold may not witness a fast and furious rally?
Those betting on a fast and furious rally in gold, need to think again. Over the last several months, gold has exhibited a forlorn condition, not reacting in anyway. Gold being a safe haven tends to react to negative economic data positively and a string of negative data points have not seen the commodity rally.

At the beginning of the year gold futures were trading at $1572 an ounce, and has since moved to $1624 - a very miserly climb. It's hardly gone anywhere in the last eight months. In fact, gold has dipped from $1788 an ounce at the same time last year, to $1620 currently.

Since the beginning of the year equities have rallied and Indian indices have climbed more than 14%, while European indices have rallied as sharply to more than 16-18%.

Why gold may not see sharp rally?

One of the largest consumers of gold, India, has see gold consumption declining, as prices escalate due to depreciation of the currency. Gold demand in India, slumped 29% in volume terms during the first three months of 2012.

Indians no longer see gold as an attractive investment, with domestic levels touching more than Rs 30,000, thanks mainly to depreciation of the Indian rupee, rather than an increase in international prices of gold. Investment in Gold ETFs is declining and investors, who have invested earlier, are encashing their profits.

Another reason is that there seems to be a re-emergence of risk appetite for riskier investment opportunities like equities. Analysts opine that an impending quantitative easing programme in the US and Europe could see a sharper rally in equities, than gold, as equities have been under owned for a long time now.

Also, there has been no rally in gold, like we have seen in equities in the last few trading sessions in anticipation of a QE3 programme. Normally, an expectation of a quantitative easing programme would spark a rally, like has happened in equities, but the same has not happened in gold, confirming a tired trend for the commodity.

Also, if things start looking up in terms of economic growth and unemployment across the globe, be rest assured that equities will beat gold in terms of out performance.

Clearly, a runaway rally in gold at the moment, may seem a little far fetched.

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