The worst is not over for gold, with global giants maintaining a bearish outlook for the yellow metal in the short to medium term.
Prices have corrected from $1,900 an ounce in August 2011 to $1,390 at present. Many brokerages have turned bearish and indications from futures markets abroad and Indian exchanges suggest bearish bets are rising. The latest report by global research firm Credit Suisse maintains gold is still expensive, relative to diversified commodity indices. It believes the sell-off could continue.
"Despite the ongoing correction, the price remains a long way above historical means. In real terms (current dollars, adjusted for the US consumer price index), the average price over the very long run (150 years) is around $520 an ounce. Even bringing the period forward to 1971 onwards only lifts that average to $780 an oz," says the report.
However, considering the past price trend, the Credit Suisse report noted a 60 per cent retracement of the 2005 levels to the September 2011 rally over a similar time frame would take gold back to around $1,000 an oz (nominal) by the end of the first quarter of 2014.
"Those who argue gold will prove its worth as a store of value over the very long term may well be proved correct but it is also right to point out that other hard assets may offer better defense against moderate (say, two to four per cent CPI) inflation over the short to medium term," it added.
It also noted that it generally paid to buy low, sell high. In that regard, gold remains high when valued against other hard assets such as base metals and US real estate, as well as against other investment classes such as US equities.
Over the past few weeks, continued relative strength in the US economy boosted the sentiment for a dollar bull market. Insiders say the bearish trend in gold would continue amid less demand from major consuming countries such as China and India. However, the sharp fall could be limited, due to fresh demand.
Sugandha Sachdeva, assistant vice-president at Religare Securities, said: "The surge in the volatility of gold prices over the past couple of days has certainly caught the nerves of traders and investors. Overall, the current price set-up and the high volatility spectacle underscores the probability that prices might have formed a short-term floor around the vicinity of recent lows and sustainability above $1,350 an ounce on the COMEX and Rs 25,300 per 10g on the MCX."