Economic volatility stemming from two financial crises that caused global shockwaves helped to drive record gold prices in 2011, but now many factors cooling the commodity’s growth. Economists are forecasting a stronger U.S. dollar bolstered by a stabilizing economy, which always forces gold prices down, while a drop in Indian demand has also dented prices. Investment experts believe that the slide is only temporary, however, and that now is a good chance to pick up gold before it reaches a projected $2,000 an ounce. Despite the downward pressure, some believe that spiking oil prices, Federal stimulus measures and uncertainty in the Eurozone will help drive gold gains in 2012. For more on this, read the following article from Money Morning.
Gold prices this week picked up again but are still far from last year’s record $1,920.30 an ounce, reached in September.
The most-active June contract settled on the Comex Friday at $1,660.20 an ounce, for a gain of 1.8%, or $30.10, since the April 5 market close.
Given the economic volatility in 2011, last year was a banner year for gold prices. Fears of global market turmoil helped push the yellow metal to record highs.
While the long-term bullish outlook for gold remains, short-term pressures have halted its steady climb.
“Gold has found more support recently, but it doesn’t have all of the catalysts in place to be driven substantially higher yet,” Suki Cooper, an analyst at Barclays Capital, told Reuters.
Here’s why this dip isn’t the start of a bearish gold year, but a chance to stock up before gold prices thrive and head to $2,000 an ounce.
The Fed, India, and Gold Prices
On April 4, the U.S. Federal Reserve released the minutes from its March 13 meeting that focused on predictions for a stabilizing U.S. economy and low inflation. The Fed’s forecast cooled talk of more monetary stimulus, and sent gold prices down about 2% last week.
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The Fed expects U.S. economic growth to progress at a steady pace throughout the quarter. With moderate expansion rather than rapid growth or deflation, there’s no need to curb borrowing, and interest rates will stay near zero.
This bodes well for the U.S. dollar, which usually puts downward pressure on gold.
It’s no secret that a weakened dollar sends investors running to the real value of hard commodities. A stronger dollar does the inverse: it causes the big investors to be less cautious with regard to investments in liquid capital, creating a dip in gold prices.
Lagging Indian imports also have contributed to lower gold prices at the beginning of this quarter.
India is the world’s leading consumer of gold. Last year alone, according to the World Gold Council, gold imports rose in that nation 1.1% to a record high of 969 tons. But this year imports have fallen, down 55% in the first quarter.
Part of the slowdown in India is due to a proposed tax for gold. Since March 17, Indian jewelers have been protesting a hike in the import duty on gold as well as the imposition of an excise tax on unbraided jewelry.
India’s Finance Minister Pranab Mukherjee finally announced on April 5 that the government would address the excise tax on gold jewelry. Bullion traders and jewelers called off the strike just in time to resume selling ahead of the Akshaya Tritiya festival that occurs on April 24. Gold sales picked up in the days and weeks ahead of the celebration, as giving gold gifts is part of the tradition.
“Though too early to tell, the re-opening of the Indian jewelers for business last Saturday should bring out the pent-up demand,” Austin Kiddle, director of London-based bullion broker Sharps Pixley, told Forbes. “The Indian consumers will gear up for the Akshaya Tritiya festival…as well as the wedding season. Physical demand, especially from India and China, is the key supporting factor for investment demand for gold.”
Gold Prices Nearing Bottom
With India’s market disruptions and the Fed’s economic outlook, gold prices will remain flat or could slip a bit more before regaining momentum. Thomson Reuters GFMS consultancy reported this week that gold would probably touch its lows for the year in the next few months.
The group released its annual gold market survey and predicted gold would continue its climb this year, hitting a record $2,000 an ounce.
“Investors are somewhat disinterested in gold, but not disillusioned,” said Philip Klapwijk, head of metals analytics at GFMS.
Klapwijk cited Eurozone debt concerns (especially about Spain), future Federal Reserve stimulus measures, and high oil prices as triggers for a renewed interest in yellow-metal purchases this year.
This means gold’s current dip is a buying opportunity before the precious metal bottoms.
This article was republished with permission from Money Morning.