Why are gold and equities moving in opposite directions?

Updated: Saturday, December 1, 2012, 11:21 [IST]

Gold witnessed its second consecutive monthly decline and shed almost 1% on Friday. Global stocks moved in the opposite direct with European stocks touching 17 month highs and Indian stocks hitting 19 month highs this week.

Asian markets were on fire with most of the markets gaining significantly, except the Shanghai Composite which continues to languish.

Clearly, while equities have been gaining, gold is losing some sheen. Equities out performance against gold is likely to continue, given the fact that there is now a renewed liking for risky assets like equities across the globe.

The Greece issue which was lingering has now been temporarily resolved with the IMF and EU agreeing on a fresh deal that will pave the country to get more bailout funds.

Except the fiscal cliff in the US, there is not much bad news that is likely to come out, making the case for equities stronger as we head into the new year. Even the fiscal cliff is likely to be resolved with the Congress agreeing on some sort of a compromise, which has led to a further decline in gold

Off late, there has been buying gold exchange traded funds, which means the support for physical gold is becoming lesser. Gold consumption in a major global player like India is waning, as the government is keen to levy duties and reduce consumption, as gold imports is putting pressure on the current account deficit and hence the Indian rupee.

Clearly, this is likely to see a further preference for equities rather than gold. Not to say that gold would fall, but, just that it would not rally like equities.

Till the "risk on" appetite continues, gold is unlikely to find favour.

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