Gold may not be too glittery in near future !
We have recently witnessed a boom and a bust cycle in global stock markets on the back of financial crisis. During this crisis of sentiment, the investors were found rushing to park their investments under the safety belt of glittering Gold.
Shelter under Safe Haven Gold
In fact, even some of the sovereign funds from countries such as India and China had to seek shelter under investments in Gold in order to diversify their foreign exchange reserves, away from the US dollar denominated assets.
But, now there are chances of even gold going bust after witnessing a scorching bull run in the past decade and the possibility can’t be ruled out that the investments at the higher end of the commodity prices may be stuck once the cycle turns over head. So, better watch out!
According to the Gold Survey 2010, Gold is nearing its final phase of its 10-year bull run. However, before the cycle going bust the gold prices could climb higher around $1300 an ounce in 2010 driven by high investment demand.
Drop in Jewellery Demand of Gold
The survey further says that the jewellery demand has dropped to less than half of total demand and that the investment demand in gold could witness a drop at some point in time which could trigger an advent of the last stage of the bull market in gold. According to an estimate, the demand for jewellery forms a big part of the gold’s consumption trend.
During the previous year 2009, the investment demand for gold surpassed jewellery fabrication demand in value terms, indicating that a large part of the demand for gold was on account of seeking safety under the safe haven property of gold during the financial crisis. The consumption of gold for jewellery fabrication has fallen to a 21-year low.
The GFMS survey expects the gold to remain range bound between $1050-1150 per ounce over the medium term horizon before the last leg of the rally towards $1300/oz plays out later during the year.
Expectation of Supply Glut
While the demand for consumption of gold has dropped significantly, the chances of supply side glut can’t be ruled out as well. GFMS has estimated that the mine production has seen a flurry to reach its second highest levels ever, putting a question mark on the sustainability of the higher gold prices. To add to the woes, supply from old gold scrap climbed 27% to 1,674 tonnes in 2009.
However, over the near to medium term duration, the prevailing worries about sovereign debt, currency problems and inflationary issues should ensure that the gold prices remain afloat at higher levels.
An interesting aspect of gold is that as prices move up highlighting the optimism of consumer demand of this yellow metal, the queue at the doors of those traditional jewellery shops witnesses a shortening trend depicting reluctance to buy on part of consumers.
All that shines is not gold. But, probably, even gold (prices) won’t shine forever?