One of the
top stories in the financial markets in 2012 has to be the stagnation in the
price of gold at around $1600 an ounce, which is down approximately 17% from
its peak at $1920.30. Those bullish on the yellow metal have been
disappointed in gold's performance while those bearish on the shiny metal
have reveled in its stagnation, saying that gold's status as a safe haven is
over.
What is behind gold's sluggish
performance in 2012? There are several reasons, but one of the key
fundamental reasons has been the lack of demand from traditionally the
largest buyer of gold on the planet - India (although China will surpass it
this year). India bought only 181.3 tons in the second quarter of 2012, a
2-year low, according to the London-based World Gold Council.
There are several factors at play as
to why Indian demand for gold has fallen. One reason is the sharp drop in the
value of its currency, the rupee, which is down by 25% versus the U.S. dollar
this year. This decline has kept gold prices high in relative terms while the
actual dollar value of gold was falling. Perhaps even more important has been
the 'war' declared on gold by its central bank which has blamed all of the
country's economic ills on Indian citizens' traditional buying of gold. In an
attempt to slow down gold and silver imports, the Indian government has
imposed new taxes on the purchase of these precious metals.
But even though demand for the
precious metal is way down in India, the situation still offers hope for gold
bulls. Why? Because we've been here before - in 2009 to be exact. In early
2009, the Indian economy and rupee tanked. Gold demand almost completely
dried up. According to precious metals consultancy GFMS, Indian demand for
gold in the first quarter of 2009 collapsed by 77%. For the full year GFMS
said Indian consumption dropped by 19%.
Now with the Indian economy slowing
to its weakest growth rate in nearly a decade and the rupee falling, we are
seeing a replay of 2009. The monsoon season has been poor, hitting farmers -
among the biggest buyers of gold - hard. Gold prices have hit a record high
in rupee terms, and India is expected to purchase, as forecast by the World
Gold Council, only 750 tons of gold, down 25% from 2011 levels. Meanwhile,
the WGC forecasts that China will buy 850 tons of gold this year.
Investors should pay heed to the
clues that recent history is giving us. The drop in Indian demand is simply a
cyclical phenomenon due to the lousy state of the Indian economy. It will
recover eventually. And when it does, look out for the fireworks from renewed
Indian demand for gold added to the Chinese demand. In 2010, as pent-up
demand for gold was unleashed, Indian gold consumption soared 74% to a record
high of 1,006 tons according to GFMS.
Gold bulls surely hope we see
something similar in 2013 and that is exactly what I talked about last week
based around gold
miner stocks and also what Dave Banister's recent gold
forecast was about at TheMarketTrendForecast.com sees in 2013.
Gold Trading & Investing Conclusion:
In short, gold and gold stocks have a
lot of work to do before they truly breakout into the next major leg higher.
I feel we are nearing that point and they may have bottomed already. Starting
a small long position to scale in I think is a safe play. But I would only
add more once the trend actually turns up and shows strength in terms of
price and volume action.
Chris Vermeulen
Editor, the
Gold and Oil Guy
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