Gold has turned a wealth-destroyer in 2013, shocking its defenders who swear by its haven properties. The yellow metal has plunged 28 per cent (in dollar terms) this year. Outflows from gold exchange-traded funds (ETFs) have hit a record this year.

SPDR Gold Trust — the world’s largest gold ETF has seen its holdings reduce by 546 tonnes — down 40 per cent. Jewellery demand too took a knock. In the September quarter, the World Gold Council reported that global jewellery demand fell 3 per cent to 474.9 tonnes. This followed a 23 per cent drop in demand from India — the world’s largest gold consumer till recently.

So, what are the factors that changed gold’s fortune?

Move to equities

US equities made a strong come back this year. Improving job market conditions, pick up in the manufacturing sector, rising property prices and increased consumer confidence, built optimism about equity investments. The dollar too strengthened.

The dollar index which measures performance of the greenback against six major currencies, moved up to 81.9 by February from 79.6 at the beginning of the year. This made global funds parked in emerging markets to move back to US equities. The Dow Jones Industrial Average and the S&P 500 index hit a five-year high in February. So, gold lost its mojo. The metal dropped below the $1,600/ounce mark in February, touching a low of $1,575/ounce.

Central bank selling

Gold prices dropped further in March as the Cyprus government announced sale of gold from its reserves to finance its bail out. The country’s gold holding was not significant enough to rattle global gold market but it set-off fears of other struggling Euro Zone countries too selling their gold. With the EU nations’ total gold holding exceeding 3,000 tonnes, even a third of it could have triggered a crash in gold prices.

On April 15, gold dropped 10 per cent to $1,336/ounce intra-day and sent shock waves across the globe. The most popular gold vehicle — SPDR Gold Trust which had 1,221 tonnes of gold in end-March saw it holdings shrink to 1,078.5 tonnes by end of April and gold closed the month at $1,477/ounce, down 12 per cent from the beginning of the year.

Fed tapering

In May came the next blow for the metal as the US Federal Reserve hinted to a scale back in stimulus for the US economy. Investors who had been hoarding gold all along seeing QE (quantitative easing) as negative for paper currency ran for exit. The logic was that cut in QE would contract money supply and gradually push up interest rates making gold less attractive.

The yellow metal hit a low of $1,338/ounce in May and dropped further to $1,180.57 in June. There has been some stability thereafter supported by physical buying in China and bets that the Federal Reserve may delay tapering. But gold has been unable to rise significantly as improving US economy dulled its demand. The final blow came with the Fed announcing beginning of the taper on December 18. On December 19, gold hit a low of $1,187.4/ounce — a three-year low.

Weak rupee hits gold

For Indian investors, loss on investments in gold was capped by the weak rupee. Spot gold prices in India are down just 3 per cent this year. The rupee has dropped from 54.9 to 62 against the dollar. The tough situation on CAD (current account deficit) that made the Government take stern measures to restrict gold imports has changed the gold market in India dramatically. It has resulted in short supply of gold in the country and gold is today at a premium of $60-70/ounce.

Also, with banks barred from selling gold coins and India Post too having discontinued selling gold, investors have been left with fewer investment options in gold. Gold ETFs are an option, but they are at a large premium to NAV.

The year ahead

Gold prices can edge little higher in 2014, if there is renewed demand from emerging markets and gold import curbs are lifted in India. But, in the first half, prices may mostly remain weak and see a range-bound movement unless there is a surprise from inflation numbers. If outflows from gold ETFs continue, and physical demand for the metal remains weak, it will be negative for gold and prices can move further down.

rajalakshmi.sivam@thehindu.co.in

(This article was published on December 27, 2013)
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