Gold to shine in 2012, but not as brightly

Analysts expect the precious metal to participate in the equity rally

Whenever the world economy has been in doubt, gold has emerged as the most preferred asset class. Given that 2011 had more than its share of uncertainties, gold outperformed all other asset classes by a stretch. Gold returned 31 per cent last year, compared a 25 per cent fall in Indian equities. While the world isn’t quite out of the woods yet, gold is beginning to come under pressure, mainly because equity markets are rallying across the world, thanks to a rush of liquidity that has hit market.

Towards the end of 2011, analysts started estimating a massive correction in gold to $1,250/oz levels by 2015, if the macro-financial situation across the globe stabilised. This question is pertinent in the face of the precious metal’s sharp fall on Wednesday, when it declined 4.3 per cent, marking its biggest one-day decline in percentage terms since December 14.

Despite the sharp fall, analysts say this does not reflect reversal in the metal’s fortunes. The market was disappointed, as Federal Reserve Chairman Ben Bernanke gave no indication of any further bond-buying programme, which pushed up the dollar and dragged down dollar-denominated commodities like gold. However, even if equities are in favour, gold is unlikely to lose its sheen. Hitesh Jain, research analyst at India Infoline continues to be “moderately” bullish on gold this year too. He says: “The overall horizon has not changed. The sell-off on Wednesday was slightly irrational. Also, gold has always participated in rallies. Some of the liquidity will come into commodities and gold.”
 

ALL THAT GLITTERS IS...
Name	Dec-11	YTD 2011	Mar 1,2012	YTD% 2012
Sensex	15,454.92	-24.64	17,583.97	13.78
Rupee/Dollar	53.07	-18.70	49.22	7.25
Gold (Rs/10g)	27,100.00	31.65	27,680.00	2.14
Source Bloomberg                                                Compiled by BS Research Bureau

Analysts expect the precious metal to find support in low real interest rates in developed economies. A report by Kotak Commodities Services says, “While gold dropped on expectation that US Fed will not consider additional bond purchases, the central bank will continue with lower interest rate. This will result in negative real interest rate, a supportive factor for gold. Gold may also gain support from buying interest from central banks.” However, if the dollar strengthens the yellow metal may come under some pressure.

For now, most analysts are sticking to their $2,000/oz forecasts for gold in 2012. According to a CitiFx Technicals report dated February 28 , “Gold’s short-term target at $1,802 is in sight. A rally through there on a close basis would lead us to extend the near term target to $2,070. The target for this year on gold is unchanged at $2,400.”