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Gold may lose sheen in year 2013

Returns from the yellow metal may be subdued, as focus returns to equities

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Thousands of investors betting on on hopes of a prolonged rally in the metal could be in for a disappointment this year. A healthy global economic outlook and stronger prospects have taken some sheen off the metal. After returning 25-32 per cent a year from 2008 to 2011, gold could now turn volatile and even see a decline in prices, analysts said.

“Year 2013 looks to be a year of uncertainty and volatility for gold,” said Gnanasekar Thiagarajan, director at Commtrendz Research.

Any government move to further raise taxes on gold imports, in a bid to tame the government’s runaway current account deficit, may not weigh down gold prices, unless demand dampens significantly. Analysts said the higher prices could be passed on to consumers.

Signs of the gold rally losing steam were visible last year, with the metal returning 13.04 per cent, against the Sensex’s 25 per cent rise. As a result, unit holders in gold-backed mutual funds started reducing exposure to the commodity. According to data from the Association of Mutual Funds in India, net inflows in gold exchange-traded funds (ETFs) halved to Rs 1,826 crore in 2012 from Rs 4,046 crore in the previous year — inflows in gold funds had declined for the first time in the last five years.(FADING GLITTER)

Analysts said the rallies before 2012 were driven by money flowing into the metal, owing to consecutive rounds of monetary policy easing by the US Federal Reserve. Then, global economies were in the doldrums and investors put money into gold, as it was considered a ‘safe haven’ instrument. However, despite the third round of monetary policy easing by the Federal Reserve last year, gold didn’t record any rally, showing investors weren’t keen on investing in the metal.

“Recently, when the Fed (Federal Reserve) came up with QE3 (the third round of quantitative easing), there was no new crisis, the markets were tired of safety and fund managers were looking for returns rather than safety. This means printing of money alone wouldn’t drive gold prices; it has to be accompanied by a major economic catastrophe,” said Kishore Narne, associate director and head (commodity & currency), Motilal Oswal Commodity Broker.

So far this financial year, the growth in investor folios in run by domestic mutual funds slowed to about 20 per cent, after doubling in 2009-10 and 2010-11. In the last financial year, the number of folios had risen 50 per cent.

“With inflation being controlled and the currency stable, gold won’t be able to continue its bull run. I believe this year, returns from gold could be flat to negative,” said Ambareesh Baliga, an independent market analyst.

In 2012, the domestic price of 10 gm of standard gold rose from Rs 27,190 to Rs 30,490.

“The rupee appreciation towards the end of 2013 would add additional pressure on gold in the domestic markets, and we expect the prices to average between Rs 27,500-28,000 per 10 gm for the entire year,” said Narne.

Sadanand Shetty, senior fund manager at Taurus Asset Management, said, “Globally, big-risk headwinds are easing off. Currencies of troubled nations in Europe have shown a definite improvement. Amid this, I do not see a repeat of earlier rallies in gold. In terms of returns, the yellow metal would take a backseat.”

Commtrendz’s Thiagarajan said for any insight into the direction in which gold was headed, he would look out for a withdrawal of the Federal Reserve’s monetary easing. “If QE continues and the European Union economies signal a recovery, the price of gold would decline, which would discourage investors to put in additional money in the metal,” he said.

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