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Gold’s Bullish Fundamentals Reasserting Themselves

The U.S. Comex gold futures have surged two weeks in a row, ending at $1,687.00 last week. They rose a further 0.30 percent this week to $1,692.20. The S&P 500 index has risen for three consecutive weeks, and rose a further 0.44 percent this week to 1,492.56, about 4.6 percent below its 2007 peak. The Euro Stoxx 50 index rose 0.26 percent this week, after falling 0.30 percent last week. The CRY Commodities index has also increased in the past two weeks, and rose a further 0.10 percent this week. The Dollar index fell below 80 on Tuesday.

The Bank of Japan Delivers Some
To end stagflation, the Bank of Japan agreed on a 2 percent inflation target, but waited on further quantitative easing, putting the 13 trillion Yen per month asset purchases on hold until January 2014. The uncertainty of the timing of unlimited quantitative easing has caused the Yen to rebound by about 2 percent since last Friday. However, the average inflation rate in the past 20 years in Japan was 0 percent p.a. The market believes that the BOJ does have to ease a lot in the longer run in order to reach its inflation goal of 2 percent, which should be supportive of gold prices.

Gold Failed to Weaken Upon Import Duty Rise in India
On 21 January, in order for the Indian government to curb the rising current account deficit, the import duty on gold and platinum was raised from 4 percent to 6 percent. Gold is the second largest import after crude oil in India. The gold imports are expected to fall by 20 to 25 percent this year, according to the All India Gems and Jewellery Trade Federation. Gold imports have probably fallen by 42 to 45 percent in 2012 due to the import duty rise. However, given that the demand for gold has been fundamentally strong due to hedging needs against inflation and currency depreciation, the increase in import duty will cause a further jump in gold smuggling.

Optimism on Stocks
According to a quarterly Bloomberg poll, about two-thirds of those surveyed expected to increase their equity positions in the next 6 months while 53 percent believed that equities would offer the highest return in 2013. The optimism on stocks likely reflects that the U.S. economy has continued to grow, the Euro has not collapsed while China has escaped a hard landing. The survey forms a positive backdrop to this week’s Davos World Economic Forum in Switzerland, with the restoration of the trust and the growth of the global economy being uppermost on the participants’ minds.

Kelly Smith
Sharps Pixley, London

23 Jan 2013 | Categories: Gold

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