The trust & patience of Gold Investors will be severely tested in 2013 as prices go on a roller-coaster ride. Gold has gained heavily since 2007 on “fear trade” based on the massive US money printing spree. Many Gold Analysts are seen divided on their views about Gold in the long & medium term. Gold Bullion failed to set a new record last year for the first time since 2007. Some Gold Market analysts are less bullish than last year & say prices will probably peak this year while some are beginning to get into a fresh Bullish mood on Gold Prices. Some are of the view that Gold will definitely continue to rise but the Gold Euphoria has certainly subsided. I have warned about Gold losing its sparkle 2013 onward for some period, right since the onset of 2012. Will Gold Prices take a breather this year after a 12 year run or will the Bull Market pick fresh momentum after a lackluster 2012? Gold Prices have surged 70% as the Fed bought $2.3 trillion of debt from December 2008 through June 2011. Investors bought $140.9 billion through exchange-traded products since Gold’s longest bull market in at least nine decades, creating a hoard bigger than the official Gold Reserves of all but two nations. Prices have retreated for three successive months as Europe’s debt crisis eased and faster growth from the US to China spurred speculation that central banks will pare back monetary stimulus. Prices retreated to a four-month low Jan. 4 after Federal Reserve minutes showed some policy makers favored ending $85 billion in monthly bond purchases this year as the recovery gains traction. Global ETP Gold Holdings stand at 2,620 metric tons, about 0.5% below the record set Dec. 20, data compiled by Bloomberg show. The wide divide in the market Options traders view is clearly seen, with the most widely held contract conferring the right to sell at $1,600 this month, while the next most popular contract gives owners the right to buy at $2,100 by March, Comex data show. Some Gold Investors are still bullish because the Eurozone remains mired in recession and Japan said Jan 11, it will spend 10.3 trillion yen ($116 billion) to end deflation. Gold Prices based in euros are falling, while yen-based Gold Prices continue to rise.
Will Gold actually start a Fresh Bull Run?
Lack of constructive progress on the US Budget Deficit is having positive implications for Gold. It is likely that some fresh speculative money that had been on the sidelines is now starting to trickle back into the Gold Market. Concerns about the US Debt Ceiling seem to weaken the US Dollar, increasing demand for Gold Bullion as a safe haven. Platinum climbed to a three-month high, narrowing its discount to Gold. If the US Government officials can come to meaningful agreement on taxing and spending matters in the coming weeks, which is still highly debatable, then it would be likely that a heavier flow of speculative money would flow out of Gold & into riskier assets. Conversely, bitterer wrangling by U.S. government officials and a mostly hollow agreement on taxing and spending measures could see fresh safe-haven investment demand for Gold, but more so for the now more attractive SILVER. The general market analysis is that when the Fed stops Quantitative Easing and economic activity improves, that will weigh on Gold Prices in the second half of 2013. I am sure as also alerted since December last year that the Fed will stop Quantitative Easing, at least stop announcing new ones, but I am not so sure of the improvement of the US Economy. There is no fundamental reason for it to rise & whatever improvement has been seen till now has only been due to the large & non-stop QE injections. Record-low interest rates and yields below the rate of Inflation on sovereign debt may sustain demand for Gold Bullion, which generally only earns returns for investors through price gains. The Fed said rates would stay close to zero as long as unemployment remains above 6.5% and Inflation projections are for no more than 2.5%. But these rates are bound to make an upside move much earlier as Inflation, which is bound to hit, picks up pace. The jobless rate held at 7.8% last month and consumer prices gained 1.8% in November from a year earlier. The US Federal Reserve will be at crossroads when the unemployment number takes a hit due to tax hikes & spending cuts that are bound to be implemented sooner than later, while Inflation starts to raise its ugly head at the most unfortunate time. Neither a rate hike nor continuation with status quo would seem the right choice then. The most important factor is negative real interest rates and there seems no end in sight there for the next couple of years. What is dangerous is if key interest rates rise the above inflation rate. Bad economic news generally favored Gold Prices but now if you are long in Gold, even Bad news may not come to the rescue, as the biggest driver of Gold Prices – the Fed’s QE will not see more expansions or new avatars. That’s Real Bad News! Higher Inflation & Higher unemployment will drain excess cash out of the individual Investment capacity. To add to the woes, the world’s largest consumer of Gold Bullion, India will soon be imposing higher import duties & taxes on Gold, by Feb end to mid March this year, to curb its staggering deficit. This will dent physical Gold Demand to quite some extent. Physical Gold Demand is also one of the largest factors in driving Gold Prices higher. In my view, the hurdles for Gold are mounting; particularly in light of the soft physical market demand.
Gold now facing Identity Crisis, technically speaking:
I have been a staunch Gold supporter since 2005 & have been alerting of a long Bull Run in Gold ever since. But I received peculiar reactions to my views on Gold then & the same is again being seen now. It was extremely difficult in convincing any investor (apart from Indians who love Gold) to have at least a small part of their funds allocated to Gold Investment in their portfolios. I am now more biased toward Silver, though I continue to hold (not fresh investment) some small investment in Gold. Silver seems to hold more promise as clarified in detail in my earlier articles.
Gold Prices are yet to exceed previous all-time highs when adjusted for inflation, with its 1980 peak of $850 equal to $2,398 today, data compiled by the Fed Bank of Minneapolis show. The size of the futures market, based on contracts outstanding, contracted about 32% since November 2010, Comex data show. Gold Bullion failed to set a new record last year for the first time since 2007, rising to within 6.5% of the all-time high of $1,921.15 reached in September 2011. For the immediate future, the $1630 seems a strong support, while there seems a reasonable resistance at $1720, which if surpassed on the wave of the Credit Rating Downgrade Risk or the Debt Ceiling issue, could lead higher to $1810 & then $1855. When partisan gridlock last brought the US government to the brink of default in August 2011, Gold Prices shot up to the highest rate ever till date. I again repeat my often made statement that, Gold will need Gigantic strength to rise above $1855 & I do not foresee that occurring anytime soon. The lower end bottom seems to be forming around $1540 to $1495 range. I now expect the declines in Gold to be more Dramatic than the Rises.
Inflation does not yet pose a Risk for the US Fed:
US Federal Reserve Chairman Ben Bernanke yesterday played down the fears of some more hawkish central bankers and investors that the Fed’s aggressive bond-buying program will lead to higher Inflation. “I don’t believe significant inflation is going to be the result of any of this,” Bernanke said in a speech at the University of Michigan. The Fed has the tools to exit its easy policy stance before inflation appears, he said. The Fed will watch closely to see whether the zero-interest rate policy that has been in place for four years could eventually lead investors to make unwise decisions, creating an asset bubble, he added. The worst thing, for the central bank to do would be “to raise interest rates prematurely,” according to Bernanke. The U.S. remains in a relatively fragile recovery & while there has been some improvement, growth remains moderate, he said. Headline Inflation rates have stayed stubbornly low recently. However, these figures are manipulated to look lower than they really are and have been moving up sharply over the past year, whether you look at the US, UK or Japan. The danger is that the central banks are being overly complacent about false figures while the trend is definitely up. Pump in more and more money, as all the central banks are doing and there is only one way for this inflation to go and that is up. Kansas City Fed Bank President Esther George noted that prices of assets such as bonds, agricultural land and high-yield and leveraged loans were at historically high levels.
The Fed cannot go on expanding its Balance Sheet endlessly & there has to be an end some where, the time for which seems to have come. Austerity, spending cuts and higher taxes are the other options but they lead to higher unemployment, protests & riots on the streets. So the outcome of the Debt Ceiling debate can safely be expected to be a mix of the two sides so as to keep the conveniently created illusions of economy improvisations intact, for some more time….