Should You buy gold? The answer is no.

Should You buy gold

Fundamental Analysis of Gold

Recently, gold is in the news after its sharpest drops in last seven months. With this, we tried to understand the gold fundamental & technical perspective. We feel that gold is poised for long consolidation & any upward movement should be used an opportunity to sell. However, for investor, one should accumulate via systematic investment route only .

Background

 Gold is a unique asset class, it is a partly a monitory asset and partly a commodity. It has offered the best return to the investor over the last decade. Gold prices have risen more than “six-fold” since 2001. After touching all time high of $1921, it consolidated and made a low of $1180. Fundamentally, in the last couple of years, “Quantitative Easing” (QE) in United States offered a huge boost to Gold prices as through this US Fed try to depressed long-term interest rates to lower levels. 

Application of Gold – what makes Gold special

 

Gold has a diverse range of industries and applications usage. Gold provides outstanding performance due to its unique technical properties. Primarily, Gold demands are coming from: jewellery, investment, central bank reserves and technology. Key differentiates , as an investment , are –

1)   Timeless investment

2)   Instant liquidity

3)   An effective diversified ( a safe haven)

4)   Gold respond when you need to most

5)   Gold is the ideal gift.

6)   Gold offer tactical inflation hedge.

 

Understanding Gold fundamental

Gold price has always been a function of sentiments rather than average demand and supply scenario. Factor such as, uncertainty due to Geo political development, or global economic problem have influenced the price more than fundamental factors. In recent time, QE was the biggest boost to the Gold price. With this perspective, let us analyze few fundamental factors for the gold price.

 

1) Marginal cost of Production

The average cost of gold production is around $ 800 (ranges from $500 to $1200). So if one adds other capital spending, & other fixed cost of around $ 200- $250, the marginal cost of gold production comes around $1000-1100 per ounce. At this point of time, high cost gold producer is not making money.

2) Demand Side 

The demands from emerging market, especially from China and India, have been driving the gold demand. However, interms of consumption, investment demand is driving the demand.

  • Historically, jewellery demand has constituted anywhere between 50-80 per cent of the total demand, but its share has started to decline in favour of investment demand, since the emergence of global financial crisis and run up in the gold prices. The world’s gold jewellery demand is dominated by India, China, US and Middle East.
  • Industrial demand usually constitutes of industrial and dental uses and accounts for around 11% of the total gold demand. Gold is irreplaceable in most of the technology app application due to its unique properties
  •  The Investment demand has gone up to around 35% compared to 9% a decade back. Recently, Gold as asset class is used as portfolio diversification & the safe haven to hedge against financial distress and economic hardship.

 

3) Supply Side

 

Unlike other commodity, gold does not consume, but it gets accumulated. Gold supply has to be looked very differently than any other consumption driven commodity. There are two major source of gold that is Mine production and recycled gold. South Africa, US & Australia is major gold producing country.

 

 

Demand & supply of Gold

 

Gold – Demand & Supply
World Gold Supply ( in MT)
2011 2012 % growth
Total Mine Production 2847 2828 -0.67%
Recycled Gold 1669 1626 -2.58%
Total Supply 4516 4454 -1.37%
World Gold Demand
Jewellery 1972 1908 -3.25%
Technology 453 428 -5.52%
total Bar Coin Demand 1515 1256 -17.10%
ETF 185 279 50.81%
Official Sector purchase 457 535 17.07%
Others -67 48
Total Demand 4515 4454 -1.35%

 

Source – World Gold Federation

 

 

Investment Option

 One can invest in gold via following route (summarized manner)

1)   Comex Gold future

2)   ETF

3)   Physical Gold

4)   Fund on Fund

5)   E- Gold ( many country have option)

 

Fundamental Price Outlook

Unlike other commodity, Gold’s value does not arise from its usefulness in Industrial or consumable applications but arises from it’s as acceptance as a “store of value”. There are the numbers of factors that determine the price of the gold at any given point of time.  Gold price is determined by the Geo-political outlook, global economic outlook, an inflation outlook, interest rate volatility, and currency-related crises.

 

Purely on a fundamental perspective, it is poised for consolidation. Few reasons are –

  • Inflation Hedge & safe haven asset – Investor sentiment will likely remain positive for equity & higher global growth.
  • Lower consumer demand from India will likely remain depressed due to import restriction
  • Analysts expect the US dollar to outperform almost all other currencies. US Dollar ($) is negatively correlated to gold

 

Recent Fundamental Events

 The medium term outlook from fundamental price prospects looks weak due to appear absolutely  gloomy, due to:

  • Ongoing US tapering process
  • Subdued Physical demand due Import duty hike in country like India
  • Slowdown of ETF flows
  • Moderation in sovereign (government) appetite 
  • Apart from this Fed tapering & rising expectations of tightening, European Central Bank (ECB) is also  expected easing in probable June may put further pressure on gold. ECB may announce a package of measures in order to combat low inflation and credit growth across euro region
  • US dollar index is strengthening against the other currency such as the euro, the environment would lead to weaken USD-dominated gold prices. 

  

Technical Outlook 

Short term

  • COMEX Gold has broken important support of $1260, last week, followed by sharp sell-off. Next logical supports exists at around $1230, $1200, $1180 & finally at $1150 in coming days.

“When we have gold we are in fear,

when we have none, we are in danger.”

 Conclusion – Gold to consolidate

We think that, after 12 years of rally, gold is set for a consolidation. 2013 was first negative year since 2000.  Both from fundamental & price (technical analysis) point of view, we feel that Gold price remains week in coming 2 years. At present, none of the existing global troubles points to a possible outbreak of a fresh financial crisis. As long as there is no renewed concern in the global economy Gold price will eventually continue to consolidate or trade lower.

 

Forex_Handy
Gold Fundamental Analysis June 3, 2014 Forecast http://t.co/3jG0rihekc
Analysis and Recommendations: Gold continued to decline giving up $3 to trade at 1254.10 as global tensions ease, inflation remains tame and the economic crisis seems to be easing into recovery. Gold…

This is written for my reader. One should consult his/ her investment adviser before investing. Pl feel free to give suggestion/ feedback at bonpriya@gmail.com

 

 

 

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