Betting on gold might not be rewarding in 2013

As the US economy improves and the dollar strengthens, gold prices are likely to remain subdued

Gold imports have bloated India’s current account deficit, but given handsome returns to investors. Over the last two years, the yellow metal has returned 42 per cent, better than any other asset class. However, returns over the last one year have been a meagre four per cent. And, going by the factors that influence gold prices in the world markets, returns from gold in 2013 might not be impressive this year, too.

In order to understand why returns may not be spectacular this year, it’s important to know the factors that influence gold prices. While demand and supply are the obvious ones, the metal also has an inverse correlation with the US dollar historically. Gold prices tend to move up when the US signals economic stress and the dollar weakens. The reverse happens when the dollar strengthens, as is the case in recent times. Over the last one month, the Dollar Index has moved up 1.7 per cent and gold has fallen 6.54 per cent. Gold is down 12 per cent from its recent peak of $1,790 on October 4, while the Dollar Index is up 2.36 per cent since then.

Till last year, bullion traders were betting on gold as there was no clarity on how the world’s largest economy would deal with its fiscal cliff and return to growth. It’s now becoming apparent that growth is returning to the US and the stimulus (QE3) is also expected to end sometime this year. The White House has also released details of its plans on spending cuts to be implemented from 2013. Gold also rallies when real interest rates are negative, which essentially is the interest an investor expects to receive after factoring in inflation. Indications are that the developed economies might start increasing interest rates as their economies stabilise. Those doubting the US recovery story need to know that Soros Fund Management and Moore Capital significantly cut their gold ETF holdings in the last quarter of 2012.

The situation in India is also not very conducive for investments in gold, as the import duty has been raised to six per cent and a weaker rupee would make gold more expensive. Commodity experts say investors should be cautious on this asset class this year.