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Nitin Nachnani: Mounting speculations on QE3 to boost gold prices

Nitin Nachnani/Mumbai 23 Aug 12 | 10:14 AM

In the international markets, gold rose to its highest level in more than three months yesterday. Will this up trend last, and is it a good time to invest in the yellow metal?

Present trend and future predictions for the next six months

Rising expectations for further stimulus measures and expansionary policies by central banks of major economies has lifted up gold prices to trade above Rs.30,000/- in the current days. Measures implemented by the EU to tackle with the Euro Zone debt situation also helped to boost investor’s confidence and hence supported the prices of precious metals. Mounting speculations that the Federal Reserve needs to introduce an additional round of stimulus also known as Quantitative Easing (QE) to support the faltering economy and if this happens then it will not only boost the commodity markets but also lead to sharp rise in equities too.

Ongoing tensions with respect to Iran created supply concerns for crude oil and this will lead to upside in oil prices which in turn will fuel inflation-hedge demand for gold. The gloomy economic outlook in the US and European efforts to fight the credit crisis has turned the outlook bullish for the medium term. Charts suggested spot gold may test resistance at $1640. If this level is breached, then prices could go up to levels of $1695.
 
Demand, supply factors with global scenario
 
Gold consumption in India and China, the two top consumers, declined sharply especially demand from the jewellery and investment sectors which in turn dropped global gold demand by 7 percent to 990 tonnes in the second quarter (Q2) of the current year, as per the data provided by the World Gold Council (WGC). Demand for yellow metal slipped across all sectors, except purchases by global central banks to shore up their reserves.

World gold usage in jewellery sector dropped sharply by 15 percent on year to 418.3 tonnes, while demand for bars and coins of gold decline 10 percent year-on-year and stood at 302.8 tonnes. Global gold-backed ETFs experienced a net outflow of 0.8 tonnes in the period between Apr-Jun as compared to the inflow of 54.1 tonnes during the same quarter a year ago as new investments in the sector were offset by outflows.

India’s gold consumption in the second quarter of 2012 declined sharply by 38 percent on year and stood at 181.3 tonnes while China's demand in the same period slipped 7 percent on year to 144.9 tonnes. World technology sector demand for gold was down by 5 percent on year to 112.2 tonnes, while the electronic sector usage dropped 4 percent to 80.5 tonnes.

However, gold buying by global central banks increased a whopping 138 percent to 157.5 tonnes, as compared to 66.2 tonnes in the same period a year earlier. Jewellery demand from Hong Kong was up by 8 percent in Apr-Jun to 7.3 percent; while in Japan it declined by 7 percent to 3.8 percent due to the weak economic environment. Gold demand by the jewellery sector in Turkey rose 4 percent on year to 23.1 tonnes, while that in the US fell 7 percent on year.
 
Considering the supply side of gold, the WGC stated that the world gold supply decreased around 6 percent on year to 1,059.1 tonnes in the second quarter of 2012.  Gold produced by recycling of slipped by 12 percent on year to 363.7 tonnes, while mine production during the quarter was slightly higher by 3 tonnes and stood at 706.4 tonnes. However, net producer de-hedging of 11 tonnes, further tightened the supply.

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(The author is a Research Analyst at Geojit Comtrade Ltd.)

 

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