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
You may be interested in
1. Gold. Is there still steam?
2. Some Golden Moments again..
3. Did gold get enough?
4.Gold hold your breath
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