How gold prices have staged a silent rally of nine per cent this year?

Updated: Saturday, February 22, 2014, 10:43 [IST]

While there is always much fuss about equities, particularly in the light of economic growth, gold has delivered better returns at least so far this year.

Spot gold which was trading at around $1250 levels per ounce in the international markets in early Feb is now trading at $1323 - that is a return of around 5 per cent already this month in dollar terms.

The price of gold at $1323 (closing price on Feb 21) means the precious metal is now trading at a three and half week high. This year the metal has risen more than nine percent so far in dollar terms. This easily beats equity returns this year.

In fact, the focus in the last few months has been on equities as markets across the globe including those in Germany, US and India hit lifetime highs. Investors seems to be chasing stocks even closer to lifetime highs, while gold melted away in 2013.

In fact, in 2013, international gold prices dropped for the first time in 12 years, as investors sold gold and bought equities, following an economic rebound across the globe.

But economists warn that should economic growth falter around the globe the bets would be back on gold. In fact, investors have bought into gold this month, as economic data from the US has not been buoyant and weak Chinese economic data compounding the misery.

However, two things could continue to put pressure on gold prices. The first is the US Fed tapering its QE3 programme. Now, the QE3 programme ensures liquidity around the globe and much of this liquidity finds its way into gold, which saw gold rallying to as much as $1920 an ounce in 2011.

The Fed has already decided to taper its aggressive bond buying programme twice - the first in Dec and the second in Jan by $10 billion each month. This means that $20 billion of QE3 has been tapered off. If there is more tapering to come in the months ahead it could put further pressure on gold prices. Read more on QE3 here

Secondly, if economic data around the globe continues to be robust, equities would continue to rally and gold prices would remain lacklustre.

At the moment it would be a difficult call to take on where gold prices are headed, as few can predict how the global economy will shape. Bad economic data is good news for gold and vice versa.

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