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Gold may not have run out of steam yet

Yellow metal fans question recovery story in developed world and contend Asian demand remains strong

Malini Bhupta  |  Mumbai 

The 12-year bull run in ended in 2013, as prices dropped 28 per cent — the biggest annual drop in over three decades, say analysts. Not all, however.

has fallen primarily due to the massive sell-off by central banks and exchange-traded funds (ETFs), as hopes of an economic revival in the developed world gained currency. Some developed economies like the US were expected to roll back their massive stimulus programme (read easy money) once growth picked up and unemployment declined. With the US reporting better than expected numbers on both growth and unemployment, it has appears the era of easy money is coming to an end.

Does this mean the bull run in gold is over? Strangely, there is no clear answer. Even as the US Federal Reserve has announced its decision to taper its massive quantitative easing (QE) programme, several other economies in the world expect to continue with their version of QE. So, easy money might still slosh around and this will sooner or later see value in a beaten-down commodity like gold. CLSA’s Chris Wood, in his weekly report titled Greed & Fear, said the US Fed is in a trap of its own making and there is no benign exit from QE. If so, gold would be essential insurance for owners of capital and the recent sell-off prove buying opportunity.

The other argument questions US recovery. In the third quarter, the US revised its gross domestic product (GDP) growth figure upwards. However, a large part of this has been driven by inventories in the system. Without the latter, growth picked up 1.7 per cent over a year. So, when incoming Fed chief Janet Yellen says the economy needs more support, it possibly means she does not plan to sharply reverse the easy money policy.

The other point global analysts such as Wood make is the decline in gold inventories on commodity exchanges, even as prices are falling. Clearly there are buyers for ETFs’ gold. The gold sold by ETFs and central banks are being refined into smaller bars and exported to Asia via Hong Kong and Switzerland. According to CLSA, Hong Kong gold from Switzerland surged 541 per cent over a year to 782 tonnes in the first 10 months of 2013. Gold by most Asian countries saw a sharp jump in 2013.

First Published: Thu, January 09 2014. 21:36 IST