By
Michelle Smith - Exclusive to Gold Investing News
2013 has
seen a renewal of risk appetite and with that has come concern about the
outlook for gold. A recent World Gold Council (WGC) commentary notes that the
metal ended 2012 on a bittersweet note, but adds that the metal’s ability to
put a 12th notch in its string of annual gains reflects underlying drivers.
Overall, the organization’s report brushes away pessimism about gold and
outlines the metal’s potential in the current environment.
The WGC
report does not deny that the gold market has faced challenges and experienced
weakness. It notes that during the fourth quarter of 2012, gold prices declined
in many currencies, including the dollar, euro, yuan and rupee. Across the
currencies, gold fell an average of 6.2 percent.
Gold
volatility was at one of the lowest quarterly levels seen in nearly a decade.
Market transaction volumes, already low throughout 2012, were even lower in Q4
relative to the rest of the year. And during that period, when market
participants were active, selling pressure dominated, as per the WGC.
Last
year, many insisted that loose monetary policy would stoke fears and drive
demand for the yellow metal, but according to the WGC, these measures had the
opposite effect.
“[T]he
combined efforts of the Fed, European Central Bank (ECB) and Bank of Japan
(BOJ) to underwrite markets with promises of unlimited monetary support served
to quell nervousness, as did the results of the US elections,” the organization
said.
Now,
midway through the first quarter of a new year, gold prices are struggling to
gain momentum as investors display renewed appetite for risk and declining
interest in safe havens. Some are concerned that gold will struggle to find a
role in this environment, but the WGC isn’t so sure.
Equities
and gold demand
Recently,
global equities have rallied as investors pour money into risk assets. The WGC
report notes that strength in these markets may be seen well into 2013. While
many view investors shifting from bonds to equities as a disadvantage for gold,
the report states that general risk aversion does not preclude prudent risk
management and portfolio diversification. In fact, the reduction of safe-haven bond
exposure provides an opportunity for gold to play a larger role in value
preservation.
Emerging
markets are the largest consumers of gold and many have improving economies.
Additionally, their central banks have continued showing support for the gold
market, while strength in their equity markets is fueling domestic sentiment,
creating a positive feedback loop. The WGC report states that the role of such
sentiment should not be underestimated.
China
China is
one nation that is experiencing economic improvement. Debates over the
possibility of a hard landing for the country have subsided. Now, following
wide-scale improvement in areas such as equities, trade, manufacturing and
services, the WGC believes that the resumption of growth is on the cards. Even
so, the organization’s report points to the nation’s corrosive inflation as
strongly supportive for gold demand — both for wealth creation and wealth
protection.
India
India,
another major gold consumer, continues to battle inflation and low levels of
economic activity. As long as this battle continues, the WGC believes that
investors are likely to remain cautious. Although demand fell last year and the
government continues to implement policies that discourage gold purchases, the
WGC sees the rupee as an important factor for the country’s gold demand.
The
report notes that rupee volatility has been declining since October. More
stable foreign exchange rates are therefore expected to provide comfort to gold
investors who typically shy away from purchases when volatility is elevated.
Japan
Turning
to the developed world, the WGC believes the re-election of Japan’s Liberal
Democrat Party led to tough rhetoric on the economy and regional diplomatic
crises. Both the expansion of unconventional monetary policy and the
geopolitical tension stemming from this victory provide support for gold.
Furthermore,
“[u]nlimited quantitative easing with an inflation target of 2% is a bold step
for a country battling with deflation, a gross debt ratio more than twice its
GDP, a 10% budget deficit, a rising exchange rate and a falling current account
balance,” the WGC report states.
The
marginal impact on yields already suggests that skepticism exists in the bond
market. Pension funds’ demand for gold may be only a trickle now, the report
notes, but if the country’s fiscal credentials deteriorate and central bank
credibility comes into question, investment demand could be underpinned.
Eurozone
It was
widely believed last year that a crisis in Europe was imminent. But the ECB
came to the rescue with its commitment to make unlimited bond purchases. That
led to a steep decline in peripheral countries’ bond yields and reduced exit
and default fears. But the WGC report warns that markets will likely put the
region’s central bank to the test. Whether the ECB will cough up the cash when
funding is required remains to be seen.
The
unexpected consequences of austerity must also be considered. Thus far, it
appears that the negative effects have been greater than anticipated.
Indicators such as rising unemployment and declining production in Germany
suggest that the region’s economy is headed in the wrong direction. Overall,
Europe appears far from safe ground and the WGC report warns that Eurozone
concerns may reignite this year.
United
States
Then
there is the US. Its appetite for gold is small compared to likes of China and
India, but its influence on the market and the global economy is hefty.
The WGC
believes that the US avoided the biggest threat to economic growth when it
managed not to go over the fiscal cliff. And a pick up in consumer spending and
corporate investment, combined with the nation’s aversion to public spending
cuts, may position this nation as one of the brighter economies in 2013.
Many
gold investors have made it clear that they view improvement in the US as a
threat to gold, but the WGC argues in its report that that is not necessarily
the case.
Positive
growth, lower consumer uncertainty and greater business visibility all lend
themselves to an increased propensity for discretionary spending — a driver of
gold demand in the jewelry and technology sectors, which together account for
over 50 percent of annual gold demand, the report states.
Furthermore,
some are concerned that the US’ economic improvement will lead to interest rate
hikes and bring an end to quantitative easing.
The WGC
report dismisses such suggestions as nothing more than optimism, as numerous
structural issues still exist.
“An end
to unconventional policy and a rise in interest rates will need to very
carefully orchestrated and are unlikely to occur for some time,” the report
states.
Furthermore,
the WGC deems it unlikely that the US will unwind its policy. That’s because
the other three major economies that embarked on a similar path — Europe, the
UK and Japan — are not even close making that step. The organization argues in
the report that unconventional policy appears to be a concerted effort to achieve
a unified, global impact and it would odd for the US to make a unilateral
change.
Though
growth prospects have brightened and sentiment has improved, the WGC report
warns that risks remain abundant. The organization is confident in gold’s
continuing role as a capital preserver during times of market stress. Investors
are also reminded that demand is determined by a globally diverse set of
drivers, not least of which is economic expansion, as evidenced by the massive
demand from emerging markets.
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