Driven by profit booking, change may be temporary; euro crisis may pull metal up later this year.
Barely within a fortnight, the yellow metal has risen 7.15 per cent to surpass the benchmark $1,600 an oz and close on Monday at $1,604 an oz. In rupee terms, the metal jumped 7.24 per cent during the same period to close at Rs 23,180 per 10g. This is the fastest jump in any fortnight in recent memory. Gold was quoted at $1,598 an oz in early afternoon London trade on Thursday.
“Gold’s recent impressive run to breach the $1,600 mark for the first time earlier this week, aided by news flow of further accommodative language by (US) Federal Reserve Chairman Bernanke and continued sovereign debt concerns in Europe, seems over-extended. The pace of the run-up presents scope for a correction in the near term. But additional price strength later in the year is possible in response to sustained financial difficulties, rising concerns over inflationary pressure and potential for further fiat currency instability,” said a report by GFMS Ltd, a London-based independent precious metals consultancy.
The consultancy expects an acceleration in total gold supply in 2011, due to a further increase in mine production, coupled with higher scrap availability. Gold supply from mines rose to about 2652 tonnes in 2010, a significant 2.7 per cent increase from the previous year.
Turning to the demand side, fabrication demand is expected to continue rising (albeit by less than 2010’s double-digit growth), while net official sector purchases are also forecast to rise strongly, due to greater purchases for reserve diversification and a near-absence of sales by signatories to the Central Bank Gold Agreement (CBGA). With regard to jewellery fabrication, demand so far this year had held up well, as the market adjusted to higher gold prices. However, growth is forecast to grind to a halt in the second half of 2011, due to prices reaching record levels and more volatility.
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Supporting the view, Gnanasekar Thiagarajan, director, Commtrendz Research, said, “The correction would be more technical in nature. Hence, we could see the price falling first to $1,550 and later towards $1,500 before the metal starts any upward journey. A dwindling global economic scenario may, however, bring gold to hit another record in the later half of 2011.”
Investors, meanwhile, continue to buoy gold in the absence of any other investment avenues. Fresh inflows of funds from both institutional and private investors, particularly into physical bullion bars and coin products, are likely to continue, irrespective of price movement.
In the second half of 2011, GFMS expects investment demand for gold to remain buoyant, as real interest rates stay low or negative in the leading economies, concerns persist or grow over sovereign debt levels and, related to this, all of the major currencies are viewed with suspicion by a large and growing group of investors.
“There is a wider scope for downside over the next couple of months in gold prices, as the speed of rise does not fundamentals. Since there is an assurance that the American economy will not be allowed to default, the gold price may see a correction on the dollar’s strength. the worsening sovereign debt crisis in Europe, however, will pull the metal again,” said Naveen Mathur, associate director (commodities and currencies), Angel Broking.