Market Review (Feb 21 to Mar 5, 2012)
Gold tumbled in the fortnight following Fed Chairman Ben Bernanke downplaying the possibility of QE3. The benchmark Comex gold contract lost more than $100 to touch a 1-month low of 1688.4 before settling at $1708.60. COMEX Gold Apr contract lost by $ 17.60/Toz while COMEX Silver May contract gained by 71.00 cents/Toz. MCX Gold Apr lost Rs. 210/10 gram and Silver May contract lost by Rs.3364/Kg. At NSEL, Ahmedabad spot Gold lost Rs.149/10 gram and Silver gained by Rs 3692/Kg. NSEL Demat e-Gold gained by Rs. 18.20/gm, while NSEL Demat E-Silver gained by Rs. 169.00/ 100 gm.
The precious metal sector reversed gains in the fortnight amid confluence of reasons ranging from concerns over the downside risks to the global economic recovery. The ongoing worries on the sovereign debt crisis in the Euro zone to dissipated hopes on the Fed's QE3. Gold was hammered after the US Federal Reserve Chairman Ben Bernanke offered a tempered view of the US economy, pouring cold water on the notion that recent upbeat signs herald a stronger recovery. Investors viewed that the Chairman's expectation that growth in the coming quarters would be 'at a pace close to or somewhat above the pace that was registered during the second half of last year' is an indication of no further quantitative easing. Meanwhile the US dollar strode higher in the fortnight against the Euro and exerted a negative influence on the yellow metal.
On the other hand, tension over the Greek debt issue and over an economic collapse expected previously during March started to ease, adding more downside pressures on the metal to trade lower, where less investors are holding the metal now as a safe haven. As per latest data China has lowered its official growth target from 8% annual growth to 7.5%. The metal was affected sharply by the Chinese announcement of cutting growth forecasts for 2012 by 0.5%, easing inflationary pressures as the expansion in China is losing momentum and in result eased demand for gold.
According to World Gold Council, China was the world's biggest gold buyer in the fourth quarter of last year, so any slowdown in growth will affect demand of gold. Gold imports to Turkey - the world's biggest producer of gold coins - meantime ticked down to 2 tonnes from 3 tonnes in Jan 2012.
On fundamental side, World Gold Council (WGC) showed that Indian gold buying fell by 44% in Q4, 2011. High prices seemed to have softened Indian demand and despite being wedding season, jewelers across India reported slow sales. The Indian Rupee strengthened, which helped cap rising gold prices in India.
Demand is expected to remain weak in India, the world's biggest gold market due to high prices. A government panel had even suggested that Indian imports could fall by over 30% in value by 2012/2013, mainly on the back of easing inflation. India's Jan inflation was recorded at 6.55%, a 26 month low and this has coincided with reduced gold demand.
Outlook
Although speculations of further quantitative easing by the Fed have been tamed, this has not dampened our bullish view on gold's outlook. We continue to believe that monetary policy by central banks will be positive for the yellow metal. The Fed would continue to weigh growth higher than inflation while the ECB prioritizes price stability.
This would give the US dollar higher opportunity to depreciate further, thus boosting gold. Another issue is that further rises in oil prices may deteriorate the US recovery prospect, making the Fed more dovish in its monetary stance. But investors to remain cautious about the impact of rising oil prices on US economic activities as this would affect the outlook of silver which have strong industrial characteristics and demand also, higher oil prices would lead to slower industrial demand.
