The long-term issues of rising deficits and debts are still in want of some meaningful resolution
Gold prices witnessed great fluctuations during July as the markets increasingly considered the prospects of further easing measures which were dashed by the communiqué from the policy makers.
As the crisis in euro zone surrounding banking woes in Spain and uncertainty relating to Greek elections aggravated, markets started building expectations for further bail out measures from the ECB.
Deterioration of economic data in US amidst the uncertain macro backdrop also led to build up of expectations that the FED would unveil in its policy meeting the third round of quantitative easing measures. For now, the FED has decided to continue keeping long term interest under check and avoided its craving for quanto-easing measures leading to a big disappointment for the markets and therefore resulting in a decline in gold prices.
Bailout measures did come at the end of the month, leading to a sharp rally in gold. Policy makers at their meeting in Brussels eased repayment rules for Spanish banks, relaxed conditions for possible aid to Italy and unveiled a 120 billion-euro ($152 billion) growth plan for the region’s economy. On the spot closing, gold prices showed an increase of 2.4 per cent for the month. However, for the quarter, it was a decline of 4.3 per cent.
Given the policy mindset, markets were indeed expecting more monetary measures like bailouts, liquidity infusions from the central banks in order to stem the immediate downfall and postpone the eventuality which has been the course since the crisis began in 2008.
Central bankers from the UK, Japan and Canada stepped up warnings on the threat to world financial markets, if Europe fails to recover from its debt crisis.
The deterioration in economic data also led to build up of hopes. US unemployment in May rose to 8.2 per cent from 8.1 per cent the prior month, and job growth slowed to 69,000, compared with 275,000 in January. Also, speculation that China may take more steps to boost economic growth was running rife.
The buildup of hopes based on economic data and the dashing of hopes on account of official communiqué led to higher volatility. And, as it’s said that there is no smoke without fire, European officials did provide for billions of dollars for Spanish banks and relaxed rules for further grants; thus diluting the criterion to bring in more rationality.
Gold has benefited from Europe’s decision as the EU plan is a step forward, and people expect the flow of funds to get less complicated.
China continues to buy more gold. Gold imports by mainland China from Hong Kong climbed a record 65 percent in April, advancing for a third straight month as investors sought a hedge against financial-market turmoil and an economic slowdown.
Gold-investment demand in China may gain more than 10 per cent this year as buyers seek a haven from Europe’s debt crisis and the prospect of weakening currencies, according to ICBC, the country’s largest bullion bank. Investors in China, facing lackluster equity markets and property curbs, are looking more to the metal (gold) for their investments.
Investment demand in China was a record 98.6 tonnes in the first quarter, 13 percent higher the same period in 2011, according to World Gold Council. Last year, it climbed 38 per cent to 258.9 tonnes compared with 2010, as overall demand gained 20 per cent to 769.8 tonnes. The council also expects China’s total gold demand to likely reach 1,000 tonnes this year.
Physical demand in India “remains very much muted” after the weakening rupee led to sharply increasing costs. Gold consumers in India, the world’s biggest importer, are “aggressively” selling the metal after prices surged to a record, an industry group said.
The jump in scrap sales adds to evidence of slowing demand in India that may lose its spot as the world’s largest bullion market in 2012 to China, according to the World Gold Council. Demand in June and July has traditionally been lower on account of lack of festive/ marriage related purchases.
Also, the rural demand is lower as farmers require money to purchase their farm related requirements for sowing. However, demand is likely to pick up from August and would indeed revive if prices are lower and stable.
Central banks continue their gold accumulation spree as a measure of diversification. Central banks in Russia, Turkey, Ukraine and Kazakhstan expanded their reserves by a combined 25 tonnes in May. Investment demand also continues to be robust. The 2,409 tonnes investors hold through ETPs is valued at about $124.8 billion and is within 0.1 per cent of the record set in March, data compiled by Bloomberg show.
Sales of American Eagle gold coins reached 54,500 ounces, the most since March, according to figures on the US Mint’s website. Investors seem to be using the decline in prices to buy more gold given the uncertain macroeconomic scenario.
There have been short term volatilities on account of a multitude of factors operating currently. However, the economic and financial background continues to be positive for the yellow metal over the long term. it is a challenging time for the yellow metal as the dollar strengthens since the focus remains on euro zone worries.
Gold has been reacting positively at times when crisis aggravates or unorthodox monetary measures like quantitative easing are undertaken by policy makers.
Global gold exchange traded product holdings have largely remained steady, despite the corrective phase, signaling that long term investors are still worried about the macro economic scenario and 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 gold investors.
The current measures taken to stem banking crisis in Spain and further money provided to Greece in order to avoid default are just temporary. It doesn’t do anything to solve the underlying problems but only tends to kick the can down the road and only tantamount to dealing with a much bigger problem in the future.
The euro zone is not any closer to solving the debt crisis engulfing the region. Investors appear to be building their gold positions to hedge against continued government failure to find credible and real solutions.
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 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 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.