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Is the gold rush slowly waning?

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Is the gold rush slowly waning?
Prior to the quantitative easing announced by the Federal Reserve in September, there was a mad scramble for gold - whether gold exchange traded funds, physical gold or gold futures.
 

In early September prices of gold (99.5 purity) reached a lifetime high touching Rs 32,425 per ten grams. The rise in domestic prices were fuelled by international prices which rallied on hopes of an announcement of quantitative easing in the US, which would ensure more liquidity into the global markets and fresh liquidity would push gold higher.

The Federal Reserve did announce quantitative easing and did not belie expectations of gold investors. However, ever since the announcement Gold Futures have dropped to a six week low, and the gold rally has fizzled out.

In fact, gold ended with a three week loss, for the very first time this year.

Gold is currently facing multiple problems. There were rumours that Federal Reserve Chairman Ben Bernanke would not be standing for a third term. That's bad news for gold, since the Federal Reserve Chairman has always pushed loose monetary policy, which leads to a lot of easy liquidity being pumped into gold.

A rise in the US dollar has also led to the decline in gold prices, particularly late last week.

Gold is already up 10% this year, making it more costly and less lucrative for investors. India, which has been one of the largest consumers for gold has seen demand declining, as depreciation in the rupee has made domestic gold very expensive.

Higher import duties towards the beginning of the year has ensured that gold prices remain at elevated levels in India.

Indians have a penchant for gold, but are unlikely to buy at such high prices. The Indian government on the other hand tries to discourage gold imports to curb the widening current account deficit.

 

Clearly, the momentum for gold has stalled and one cannot see any reason for a sharp rally in the commodity, at least in the short term. In the long term, movement of gold is always hard to predict.

GoodReturns.in

Read more about: gold
Story first published: Saturday, October 27, 2012, 12:02 [IST]
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