Gold is melting..

Every asset has a price cycle; in the case of gold, it was not visible for a very long term and now it is got to show its moment of truth.

1. What spelled this reversal of trend? The fear of potential broad application of policy of  selling Gold of   Cyprus being imitated by countries like Spain, Italy and many more  is the main catalyst for the sell-off. The fear may or may not come true. But the signalling effect had been dramatic. While the U.S. economy is showing signs of economic vigour, the other developed economies - especially the Euro zone is in a situation of debt-overhang and is reporting dismal economic growth. The entire Euro zone economy is facing double-digit unemployment rate (of 12% in February 2013 as reported by Eurostat) and the manufacturing industry is under a recessionary phase and therefore the business confidence too is negative (at -0.86 in March 2013 as reported by European Commission).

2. Is it a trend? How long it could go??
Spot gold dropped as low as USD 1,384.69 an ounce before recovering slightly to USD 1,406 during Monday 15 April 2013 afternoon trading, still down nearly 5 percent. Gold is on course to record the biggest two-day fall since 1983.

3. Is there sufficient evidence? 
   The statistical evidences and fundamental factors indicate the downward spiraling  will be there for some time just like the upward trend that we have already seen.

4. Impact on Indian Markets

Since  gold imports contributes over 50% of the current account deficit in CY12,  a drop in gold prices should help lower India’s Current Account Deficit(CAD). This should in turn provide a significant boost to the risk perception surrounding the rupee.


This could signal  a drop in imported inflation which can pave the way for lower interest rates.

In India, more than  half of  household savings are in physical assets, mostly gold and real estate. A sustained bear market in gold may help move money to either more productive, economy-boosting investments or to plain consumption of other goods and services.

  With hardly  2-5% of India's household savings flowing into equity markets, a decline in prices of competing asset classes can result in asset allocation towards financial assets, especially equities, given falling bond yields.
Corrective phases would encourage smart investors to buy more gold, thereby leading to increase in demand. Despite import duty on gold hiked to 6.0% (in order to curb CAD), demand would not deter. In fact that has buoyed-up smuggling activity for 'tola' bars (or unnumbered bars) in the country

Conclusion

Whatever your risk appetite is, Gold should always form an integral part of your portfolio; while the debt and equity portion in your portfolio may change according to the changes in the broader market risk as well as your risk appetite and nearness of the goal for which you made your investments

HAPPY INVESTING

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