Last Updated : 07 December 2012 at 12:05 IST
Gold is plagued by a bear these days. Markets call the bear a mystery seller carrying out gold trade in twilight hours. But one thing is for sure: gold as a commodity is much much bigger than the mystery seller. It would continue to be a safe haven asset for one obvious reason: there is no substitute for gold. In fact gold has no other use. If there had been no investment, there would not have been gold.
Aurum has an aura and that aura is the aura of investment. Until it gets stripped, gold would remain as a king of commodities and commodity of kings (and central bankers). Gold would always be thought of as a commodity that should be purchased in dips and often not sold in ups. That is gold and that is the kind of resilience and leverage it has.
So much for the eulogy!
Now, let us come to the four macro-economic factors that could support gold in the long term. Two of the four factors have a flip side which would also be put forth.
Eurozone crisis tops the list...
Euro area crisis
It need not be stated that Eurozone is in a mess.
“The Governing Council of ECB continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States...” the European Central Bank President Mario Draghi said in a statement yesterday.
“The economic weakness in the euro area is expected to extend into next year.” he added. “...annual real GDP growth (is expected) in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014.”.
Now, that is a contraction of 0.4% in a minimum sense.
“Later in 2013 economic activity should gradually recover, as global demand strengthens and our accommodative monetary policy stance and significantly improved financial market confidence work their way through to the economy. In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring.” Draghi stressed.
If the ECB President says that Eurozone is contracting, gold prices can remain well supported. In a contracting economy, there is no better way to preserve your wealth than investing in gold. This would keep gold prices supported over a long term.
Also, see that Mario Draghi has not left out US fiscal cliff issue in his speech. That makes our second candidate.
US Fiscal cliff issue
Fiscal cliff issue has flip side to it, which I would explain first: if US goes off the cliff then chances are more that the gold prices would skyrocket. But chances are less that US would go off the cliff: it would be the judgement day for Republicans if it happens to be so.
$600 billion in spending cuts and tax hikes that would kick-in in January, subject to failure of the current talks, is expected to take US back into recession. That can inflict panic in marketswhose consequnces could be so unceratain and complicated that gold would gravitate into new realms.
$600 billion in spending cuts and tax hikes that would kick-in in January, subject to failure of the current talks, is expected to take US back into recession. That can inflict panic in marketswhose consequnces could be so unceratain and complicated that gold would gravitate into new realms.
To understand fiscal cliff issue better, see this post
China demand
China is not only the world's biggest producer of gold, it is also its top consumer.
China, the world's top gold producer is aiming to come out with 420-450 tons of gold in 2015 which is 25% higher than 2011, China's Ministry of Industry and Information Technology said recently. The country is expected to consume 1000 tons of gold in 2015.
The darling of copper is also the heart-throb of gold. And as long as China consider gold as a strategic asset, gold prices would just have to head northwards.
Meanwhile, India, the second biggest consumer of gold is worried that the nation has to import gold in so high quantities that it is hurting balance of payments according to Subir Gokarn, Deputy Governor of Reserve Bank of India, India's central bank.
According to Gokarn, “India imports about one-fourth of the total global supply of a little over 4,000 tonnes, and this excess gold demand is creating stress on the system, particularly on the balance of payments.”, the Hindu Business Line quoted him as saying.
QE4
There are rumours of a QE4 in market circles. But the QE4 too has a flip side. If the QE4 is of the same nature as that of QE3cited by Dennis Gartman, then chances are less that markets would respond with agility.
Still easing is easing and QE4 by the world's biggest economy will not go unnoticed. If QE4 is something to the tune of QE2—the latter saw at least $600 bn pumped into the economy in bond re-purchase-- then gold would hit the skies.
Operation Twist is coming to an end and today's job market report would give us a better idea regarding the course of US Federal Reserve monetary policy. Afterall, Ben Bernanke has tethered easing to improvement in job markets.
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