In an unprecedented development,the price of gold crashed by Rs 1,250 per 10 grams on Saturday in the futures trade. This bought down gold prices below Rs 28,000 and dented investor sentiment deeply and showing the rough time that the yellow metal may have going forward. In the spot market,the fall on Saturday was Rs 795 or 2.8 per cent which takes the total fall in gold over the last five months to 13.4 per cent now. Gold has ruled the markets in terms of generating returns over the last ten years but the financial year 2012-13 proved be a dull one for gold investors. Last fiscal,gold rose by only 5.6 per cent thereby losing its charm among investors to a certain extent. This is the lowest return generated by gold in eight years. On Saturday,gold prices in Delhi closed at Rs 28,150 per 10 grams following the fall in the global markets where it fell below the psychological mark of $1,500 per oz to close at 1,477 per oz on Friday,thereby raising concern among investors,especially those who invested at above Rs 30,000 levels. At a time when there are hints of improvement in the US economy,the fall in prices is inevitable and so the question that comes up is whether gold had rallied too far,too fast and what should one do now? Falling demand According to the data released by the World Gold Council,the global demand for gold went down by 4 per cent in the year 2012 from 4,582 tonnes in 2011 to 4,405 tonnes in 2012. While the investment demand went down by 10 per cent from 1,700 tonnes in 2011 to 1,534 tonnes in 2012,the technology sector and jewellery demand too fell by 5 per cent and 3 per cent respectively. Interestingly,only the demand from the central banks went up in 2012 as it rose by 17 per cent. It,however,accounts for only 12 per cent of the total global gold demand. Even India,which never seems to be losing love for gold,witnessed an overall decline in gold demand of 12 per cent from 986 tonnes in 2011 to 864 tonnes. While the demand in tonnes for jewellery fell by 11 per cent,investment demand fell by 15 per cent during the year. Whats making gold dull The fall in gold prices over a sustained period of 5-6 months has been a rare phenomenon in the last 8-10 years. However,over the last five months,the fall in price of gold has been around 11 per cent. Market experts are pointing towards various reason for the same. If high gold prices were the reason for the weak jewellery demand,there is a weakness in the overall demand even though liquidity in the market remains high. It is uncommon to see gold not reacting to positive news of debasement of currency. While major economies have maintained easy monetary policy,it is no longer providing the fuel to support the prices, said Rajini Panicker,head of commodities research at Phillip Capital. Gold is losing its safe haven status and the confidence has been eroded. There are others who say that the uptick in US economy is the major reason for the fall in the prices of gold. When the US economy is on recovery path and a lot of money is moving out from gold into US equities, said a senior fund manager with a leading fund house who did not wish to be named. Apparently,in the same period that gold has fallen by 11 per cent,Dow Jones Industrial Average the premier index in US has risen by 14 per cent from 13,025 to 14,855. Price outlook Gold price rise has been a phenomenon that has continued for a really long time but experts are now echoing the possibility of a weakness to continue for some time. The fact that the inverse relationship with dollar is not holding (generally when dollar falls then gold rises,but in recent past this gold prices fell even as dollar fell) and prices are falling even when US,Japan and Europe have been maintaining easy monetary policy. This is posing a bearing outlook in for the future. However,a recent report by the global research firm Thomson Reuters GFMS has forecasted gold to hit 1,800 per oz (around Rs 31,500 per 10 grams) by the end of the calendar. Gold was trading at 1,532 per oz on Friday. Neal Meader,head of precious metals research and forecasts at Thomson Reuters GFMS while releasing the report said that developments in US developments will be the key factor and the negatives for gold prices are already priced into the prices. There are others who think so. I think that the easy monetary policy by developed economies is only deferring the problems and it will lead to inflation going forward. While it continues to remain under pressure,it is bound to bounce back, said the fund manager with a mutual fund. Rajini,however,feels that gold had run a little too far and the bullish phase may be over for now. What should you do? An investor of gold in Mumbai who runs a logistics business and did not wish to be identified said that he had pulled out his investments from mutual funds in mid-2012 and invested all of them in gold when the price was around Rs 30,000 per ten grams in anticipation of a rally. Having seen his call falling flat,he recently exited from his investments booking the losses as he did not want to see his losses grow with further fall in gold prices. While many investors may be thinking of toeing this line and to restrict their losses,one must not forget that gold has for decades generated above inflation returns and preserves its value and may prove to be a good investment in the long term. While putting all your investment for betting on gold is a wrong call,it should be seen as an asset class where only a limited portion of your investments should be parked. Gold should be held by investors as in the long run it generates above inflation return. But investors should not get carried away by the returns in the recent past and stick to around 5 per cent of their networth into gold, said Veer Sardesai,a Pune based financial planner. Investment in gold should be for stability,security and diversity of the portfolio and not for supernormal gains in the short term. If you wish to invest do it for the long term through a systematic investment plans in exchange traded funds. sandeep.singh@expressindia.com
