Gold to continue dazzling in New Year

Last Updated: Mon, Dec 31, 2012 04:28 hrs

The main factor in the gold market today is the unrealistic heap of sovereign debt through the Western financial system

Despite gold prices rising in 2012, it’s been a less-than-stellar performance this year. After setting a record high last year, the yellow metal’s been in consolidation mode. Earlier, consolidation in gold happened in 2006 and 2008. But as a result of ill-conceived monetary ideologies, it steadily regained ground.

It's puzzling that gold hasn't broken into new highs, despite enough catalysts. There were announcements akin to quantitative easing (QE) in a bid to resolve issues ranging from solvency to growth.

Despite a bull-run in gold, now in its 12th year, it remains far from understood. This year, we saw more of promises and less of action. Central banks took liquidity-related measures to keep yields under check but avoided aggressive easing. Therefore, the dominant catalyst that gold thrives on was largely absent compared to the previous years, resulting in a less stellar performance.

Besides, reduced physical offtake in key consumption centres put gold prices under pressure. Cautious optimism surrounding growth and illusionary increase in risk appetite also resulted in lack of further momentum buying.

Remember why gold has climbed for 10 straight years, and from that long-term perspective, not much has changed.

Pledges of monetary interventions in unlimited quantities and time horizons exemplify the ill-conceived ideologies. The main reason we believe gold’s fundamentals are intact is because of the policy-making theories - mainly that the economy can be strengthened via more monetary inflation, further credit expansion and more government spending.

The main factor in the gold market today is the unrealistic heap of sovereign debt through the Western financial system.

Negative real rates still prevail, and with the economic outlook still showing no sign of real improvement, negative real rates will not fade away easily, as any increase in interest rates would cause considerable strain to already hampered public finances. They are likely to exist for a longer time and would probably help gold move up as investors look at it from a wealth preservation perspective.

Head winds
It is feared that a stronger recovery would diminish the probability of further monetary infusions and thereby reduce demand for gold. But, it would certainly risk runaway inflation. The Fed has strategised to avoid withdrawing until a firm recovery is at hand, which could be late. Also, there is no surety of return to a surplus world.

The long-term trends
Long-term trends in gold prices are driven by changes in the level of confidence in the monetary system and the economy. As governments struggle with rising deficits and unsustainable debts, it is logical for gold prices to rise.

Though we have seen demand from key consumption centres like India and China remain subdued; it’s likely to bounce back strongly for both economic and cultural reasons. Central bank buying, accompanied by robust investment demand, would continue to support gold prices. Broad themes that would drive gold prices are currency debasement, rising inflationary fears and diversification of investments and reserves into gold.

The uncertain macroeconomic environment and looming inflationary threat over the long term reiterates the need for gold in one’s portfolio. Make a strategic allocation to gold because it's the counterweight to paper money, which is losing credibility as a store of value.

More from Sify: