COMMODITY COMMENTARY. It’s a little early to write off gold

Have gold bulls capitulated too soon or has investor fatigue overtaken the market? This is a question asked by almost anyone betting on gold. Admittedly, since April 2013 a series of developments generally understood to be gold-negative have battered the market. Some of these drivers have actually strengthened in recent months.

Improving economic data especially in the US (rising asset prices, falling unemployment rate), a less-unstable geopolitical environment, rising dollar, muted inflation expectation largely because of falling crude oil prices and last but not the least, normalisation of the US monetary policy (Fed’s liquidity tightening) all combined to create a sentiment that drove long position holders to liquidate.

There was also a massive exodus from exchange traded products. In 2013, there was an outflow of over 800 tonnes or nearly a third of physically-backed ETP holdings. With gold’s tepid price performance in recent months, the market fell well below the psychological level of $1,200 an ounce to as low as $1,132 last week (the lowest since April 2010). Of course it has rebounded a little and whether the minor price gain will sustain is being debated.

But a bigger question is whether too much has happened too soon and whether the price fall was overdone in the first place. Clearly, gold’s fundamentals have changed little but the commodity seldom moves on fundamentals alone. Gold supportive factors have not totally withered away. Import into China and India, two of the world’s largest consumers, has shown an uptick in the last few quarters. Although slowing, China’s retail sales of jewellery have remained robust. India’s gold imports have risen steadily since the beginning of this year. While price-sensitive consumer demand is seen picking up because of more friendly prices and seasonal factors, the same cannot be said about investment demand. Poor price performance of the metal has driven bargain hunters to the sidelines.

The currency market could come to gold’s rescue. Belief is now gaining ground that the greenback may not continue with its dramatic rise seen in the last few months. While the currency will gain strength, further gains will be slow and modest. Despite this, the monetary stimulus by Europe and Japan may support gold even though the dollar may have risen.

Unlike in 2013, this year, outflows from gold ETFs have been substantially slow. So far this year, just about 100 tonnes have moved out versus over 800 tonnes last year. Mine production needs to be watched. It is estimated to be at just 1.2 per cent for 2014 and may fall even lower next year. Falling prices also mean lower scrap sales. Unlike in the previous two years, there has been a fall in scrap sales in 2013 and 2014 which in turn can tighten availability.

Maybe, it is a little too early to write off gold.

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