Subdued performance in 2012
2012 was a year of sideways price action for gold as the metal consolidated inside a $300 band between $1,527 (Rs. 27,170) and $1,796 (Rs. 32,464). The yellow metal was unable to maintain its bullish momentum for the first time in four years, as subdued jewellery and coins & bar demand more than offset strong inflows into ETFs and continued gold buying by central banks. In spite of such sideways movement, gold managed to notch a 12th consecutive yearly gain, primarily boosted by policy easing across different parts of the world (especially in the U.S.).
Physical demand from India and China, two of the largest gold consumers, ebbed in 2012. The slowing demand from India was in reaction to elevated gold price in Rupee terms as well as steps being taken by the government to curb gold imports (such as hike in import duty on the metal). Meanwhile, the slowdown in demand from China was largely due to slowing economic conditions across the world’s second largest economy.
Near-term Outlook (3-months)
Gold has been in an uptrend since the turn of the 21st century, but the steepness of the ascent has risen even more since 2008 boosted by huge amounts of liquidity poured by central banks across the world in their respective economies. Accommodative policies are likely to remain in place in 2013 while the Fed’s balance sheet is expected to touch $4 trillion mark by the end of the year (assuming the Fed continues purchasing $85 billion worth long-term securities each month from January until the year-end). This would be the key factor supportive of gold in the coming months. However, if physical demand from India and China continues to remain subdued, gold may find difficulty in moving past the key $1,800 barrier. Meanwhile, any rally to fresh record high is likely to be met with increase in mine output and scrap sales – something which is likely to cap further upside possibly around the psychological $2,000 level.
The downside in the metal in the coming months is likely to be contained near $1,470-$1,500 zone. We believe any dip towards such levels would attract strong physical demand from India and China as well as from central banks (especially those from emerging markets), while it is also likely to increase the probability that mining companies will reduce their output of gold at such levels. This eventually should help limit further downside in the metal.
Key factor to keep an eye-on in the near-term
What kind of progress made by the U.S. government to avoid the ‘fiscal cliff’ is likely to impact most asset classes traded in the market, including gold? If the government fails to reach a deal before December 31st, the U.S. will fall off the cliff and possibly move into recession, which could increase safe haven appeal for gold, though upside could be limited as equities and crude oil would most certainly come under heavy pressure. However, if a deal is reached on time, equities could rally sharply along with crude oil and base metals, which could in turn lift gold prices higher as well.
- The major factor is policy initiatives that would remain in place in 2013. Central banks across the developed economies such as U.S., Euro zone, Japan, and U.K. are likely to keep their policies accommodative, which will increase appeal for gold as an inflation hedge.
- Upbeat data coming out during the past 3-months indicates that China could have bottomed out in Q3. This coupled with the possibility of more stimulus being introduced under the incoming leadership of Xi Jinping is likely to increase physical demand for gold from China.
- Central banks have stayed on as net buyers of gold since 2010. With currency devaluation likely to continue in the developed economies in 2013, the official sector is likely to continue remaining net purchasers of gold and this would provide a strong boost to the yellow metal.
- Although investment demand for 2012 is likely to have fallen short of 2011’s record high figure, risks to global economic recovery continue to remain high and this in turn is likely to keep investment demand for gold intact in 2013.
- With yields on safest government securities hovering near extremely low levels and currencies like the dollar, yen, and Swiss franc subject to central bank actions, gold is the only key safe haven alternative available in case global economic conditions deteriorate.
- Geo-political uncertainty is one such factor that cannot be ruled out. If tensions between mid-east and the west escalate further, safe haven demand for gold is likely to increase.
- Revival of U.S. economy would be the major risk factor that could limit the upside in gold prices in the near-term. Any sustained improvement in the labour sector and the Fed could start to scale back the size of its asset purchases. This has a potential to weigh heavily on gold.
- Euro area recovery also remains a possible factor that could pressurize gold. If yields on govt. securities of the indebted EU member nations decline further, investment appeal for gold from Euro area could decline as people would then prefer seeking returns from riskier assets.
- Subdued physical demand for gold from India and China was one of the key factors that limited the upside in gold in 2012. If demand from these two countries does not pick up in 2013, the upside in gold is likely to be limited.
Rebound from $1672.5 is corrective in nature and should have finished at $1755 already. Near term outlook stays mildly bearish as long as $1700 resistance holds and deeper fall should be seen to $1630 support first. Break will extend the fall from $1796 for 61.8% retracement of $1523 to $1796 at $1630. Above $1700 resistance will bring another rise but we’d be cautious on reversal signal again as it approves $1764/1772 resistance.
In the bigger picture, price actions from $1921 high are viewed as a medium term consolidation pattern. There is no indication that such consolidation is finished, and more range trading could be seen. In any case, downside of any falling leg should be contained by $1467/1564 support zone and bring rebound. Meanwhile, break of $1805/1828 resistance zone will argue that the long term up trend is possibly resuming for a new high above $1921.
In the long term picture, with $1467 support intact, there is no change in the long term bullish outlook in gold. While some more medium term consolidation cannot be ruled out, we’d anticipate an eventual break of $2000 psychological level in the long run.
Senior Vice President
Commodities & Currencies
Source : Bullion Bulletin