Will gold continue to shine?

Gold may see a temporary rally once US sequester begins but it may be short-lived

Gold has made a Midas out of many Indians over the last decade as it appreciated 500% between 2001 and 2012. The average returns from gold have been 17% since 2002, far higher than any other asset class. However, compared to last year’s closing at $1920/troy ounce, gold prices in the international markets are down by over 20%.

The question now is will this asset class continue to shine given that the developed world is coming out of prolonged economic crisis.

The uncertainty, however, is not over for the US. The famed US sequester is yet to kick off, whereby the US will cut spends in defense, non-defense and medicare. This could lead to some weakness for the US economy. Analysts expect money to rush to the safe haven before the sequester begins and thereafter, the dollar could weaken. This could keep gold prices in check, no runaway fall or rise, if liquidity remains tight.

Also going forward, currently depressed gold demand could make a sharp comeback next year when elections are over and economy settles down. The latent demand for gold may comeback. According to Emkay Global, “Gold prices had moved higher more than 15% over the expectation and the announcement of QE3. So now when the announcement of QE3 tapering and closing comes into picture market will be bearish on Gold. Positive economic outlook and reduced liquidity can prove bearish for Bullions sector as a whole. Along with Gold, other commodities and equities can witness a downfall.”

In recent times, gold has inched up in international markets due to physical demand from China and slowing sales of gold by exchange traded funds. However, Morgan Stanley believes the recent gold price rally will likely fade towards year-end as the headwinds that have pressured gold throughout the year reemerge.