Gold prices continued its correction process as prices tumbled by more than $100 to test the support it‟s holding onto near the $1520 an ounce mark. Gold declined as the dollar rose due to deteriorating crisis in Europe outlined by markets anticipating a higher probability of a Greece exit and worsen financial woes of Spain.
However, as expected, much to the respite for gold investors, we also saw signs of strength in gold at the end of the month as markets weighed on the prospects of further easing measures and also as the crisis aggravated.
We are seeing a deepening political turmoil in Greece. The political standoff has reignited concern that the country will renege on pledges to cut spending as negotiated under the bailout pre conditions. Leadership vacuum in Greece continues to trigger an increased probability for the currency union experiencing first-ever departure of a member state.
Subsequently, the Greek political impasse led to a significant weakening of the euro. People wanted to move to cash anticipating a liquidity crunch as witnessed during the aftermath of the Lehman crisis leading to the
strengthening of the dollar which continued to hurt gold.
The euro was also under pressure as crisis aggravated in other Euro nations as well. Spain‟s financial situation showed signs of worsening. Egan-Jones Ratings reduced its credit rating for Spain to B from BB-. The cost of insuring against default on Spanish sovereign bonds rose to a record as the nation struggles to rescue its ailing banks. The European Union said that Italy‟s high government debt and sluggish economy make the country even more vulnerable to the region‟s financial crisis.
We can see an increased interest in buying in gold at lower levels. Expectations of some form of easing have also helped prices recover. Speculation of the Fed looking at some kind of easing because of soft US data seemed gaining momentum, and that‟s good for gold as any kind of easing is inflationary. We did expect that gold would react positively on signs of severe aggravation of crisis or on first signs of monetary debasement and to see gold return to react positively to macro stresses was indeed encouraging.
Central banks continue their gold accumulation spree, thus boosting sentiment. Central banks, the world‟s biggest holders of gold, continued to buy bullion in April as Turkey raised its reserves by 29.7 tonnes and Ukraine, Mexico and Kazakhstan boosted their holdings. Central banks‟ net purchases last year were the most since 1964.
In 2010, they turned to a net buyer for the first time in 15 years. Iran boosted imports of gold, jewelry and precious metals from Turkey to $480 million in March from $13 million a year
ago in a bid to switch to portable wealth. Sanctions aimed at isolating Iran because of its nuclear programme, combined with revolutions in the Middle East, have spurred a tripling in the region‟s purchases of Turkish precious metals and jewels to $942 million in the first three months, from $282 million in the same period last year.
World Gold demand fell 4.6 percent in the first quarter as higher prices and taxes on the metal in India spurred lower jewellery purchases. Global demand dropped to 1,097.6 metric tons in the quarter compared with 1,150.7 tonnes a year earlier. Investment demand increased by 13 per cent to 389.3 tonnes in the quarter. Although, total coin and bar demand slipped 17 per cent to 337.9 tonnes, ETP holdings added 39.8 tonnes in the quarter, compared with sales of 66.7 tonnes a year earlier making up for the decline in demand for traditional coins and bars.
Jewellery demand slipped 6.3 per cent to 519.8 tonnes as Indian buying slid 19 per cent to 152 tonnes. Indian jewellers closed stores in the longest-ever strike from March after the government twice raised the tax on gold imports and introduced an excise duty on non-branded gold jewellery. A weaker rupee versus the dollar meant that average local bullion prices in the first quarter were 35 per cent higher than a year earlier; also contributing to lower demand.
On the other hand, the demand from China remains fairly robust. Mainland China‟s gold imports from Hong Kong surged more than six-fold in the first quarter to 135.53 tonnes. Shipments in March rose by 59 per cent more than in February. Imports from Hong Kong were 135,529 kg (135.53 tonnes) between January and March, much more than what was 19,729 kg in the year-earlier period. Total demand from the nation was 255.2 tonnes, 23 per cent more than India.
Demand has climbed up in China after rising incomes and curbs on property speculation boosted purchases. The world gold council reiterated its prediction that China will become the No. 1 consumer this year on an annual basis saying that “While it‟s largely related to price, negative real interest rates should keep demand strong”.
China‟s demand, which rose to a record 255.2 tonnes in the first quarter, may gain to between 900 tonnes and 1,000 tonnes this year, from 769.8 tonnes in 2011 and Indian usage may be between 800 tonnes to 900 tonnes, from 933.4 tonnes, Albert Cheng, Far East managing director at the group, said.
On the supply front, mining output and scrap continue to increase thus reducing the impact of diminished central bank selling. Mine output increased 3.2 per cent to 673.8 tonnes in the first quarter from a year earlier. Scrap supply climbed 11 per cent to 391.5 tonnes in the period. However, average world mine production costs continue to climb and are estimated
at $960 an ounce.
Though there have been short-term volatilities on account of a multitude of factors operating currently; the economic and financial background continues to be positive for the yellow metal. It‟s been challenging times for the yellow metal as the dollar strengthens since the focus remains on wuro zone worries.
At the end of the month and moving into June, as expected we have seen gold show signs of strength as euro zone crisis aggravates and the increasingly possibility of further monetary easing looms large. Global gold exchange traded products holdings have largely remained steady despite the corrective phase signaling that long-term investors are still worried about the macro economic scenario as well as the issues surrounding currency debasement and still prefer gold as an effective portfolio diversification tool.
Such signs of strength in gold are indeed encouraging for such gold investors. With tensions in the Eurozone resurfacing, uncertainty is coming back. This is helping to build a good foundation. In Europe, for instance, Spain is becoming a real worry and it‟s much larger than Greece. The political developments in the Euro zone
countries may aggravate the crisis further.
Communication from the Federal reserve that they still have all the options open in case economy deteriorates further when viewed along with the recent weakness in economic data leads to an increasing probability of further easing measures which have helped gold move higher since the after math of crisis in 2008.
If Europe also find its solution in the form of bailing out beleaguered nations by ECB money creation exercise then it will highly aggravate the currency debasement issues and would possibly help gold strengthen even further.
The global economy is shrouded in various uncertainties. The long term issues of rising deficits and debts are still in want of some meaningful resolution. The western world is still grappling with a massive and unrealistic heap of sovereign debt. These high levels of debt, combined with slow economic growth have compelled central banks around the world to print‟ more dollars (and other currencies), stimulate the economy and inflate away the debt burden with an intentional plan of currency devaluation.
In the light of these macro events, gold appears to remain favourable as an effective portfolio diversifier.