4 reasons why gold investors have to be patient

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4 reasons why gold investors have to be patient
International prices of gold have been dropping ever since it peaked in September 2012, when the Federal Reserve announced its quantitative easing programme. Domestic gold moves in tandem with international prices, the other important variable being the Indian rupee. Investors looking at quick returns from gold as in the past could be disappointed and here is why.

1) Money is flowing into equities

Money is flowing into equities and a clear indication of that is how global markets are rallying. The US Dow Jones touched a historic peak, while the French CAC, the German DAX and the Japanese Nikkei have hit 5 year highs. Investors, particularly hedge funds are selling gold and buying into equities, as equities can give superior returns, being more volatile then gold. Unless, there is a global catastrophe, investors are not going to find shelter in gold.

2) Physical demand for gold is falling

According to the World Gold Council in 2012 annual investment volumes declined. There was also a 17 per cent drop in demand for bars and coins, while jewellery saw a 3 per cent decline in demand volume to 1,908 tonnes. The supply of gold contracted by 1.4% to 4,453.3 tonnes in 2012.

3) Indian government keen to dampen gold imports

India which is one of the largest gold consumers, has been discouraged by its government from importing gold. The government has levied duties to make gold imports costlier, as the country's current account deficit is spiralling out of control. India's gold imports is next only to crude and this is posing problems for the currency, since imports have to be paid in dollars. There have been additional duties in quick succession and this has dampened sentiments for gold.

4) Gold ETFs are seeing distressed selling

ETFs are seeing redemption like never before, as investors are slowly preferring equities. In fact, a record $4.1 billion was pulled from gold ETFs in February, the largest single month of net outflows from a prominent Group managing gold ETFs.

Clearly, there are issues that are currently not in favour of gold. Investors looking at quick returns from gold as in the past could be disappointed.


Read more about: gold
Story first published: Saturday, March 9, 2013, 9:35 [IST]
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