Gold hit by a perfect storm
The two main forces in gold demand are investment and
jewellery. The rationale behind investment demand is linked to the massive
liquidity injections from central banks, which, eventually, should lead to a
broad deprecation of fiat currencies and a period of high inflation. But for
months now, inflation expectations have remained subdued and, recently, the Fed
has made it clear that it is on the brink of reducing its liquidity injections.
Coupled with a recent rise in yields, the rationale to buy or hold gold has
lost much of its attractiveness. On the other hand, jewellery demand, through
its two biggest buyers, has also weakened. China's demand has declined along
with its economic growth rate and the recent concerns about its credit
conditions. Meanwhile, India's imports have been penalised by a sharp
devaluation of its currency and by government restrictions to curb the private
households demand for gold, which led to a current account deficit as a
percentage of its GDP close to one of the highest of any big economy.
Don't catch a falling knife
While the demand for Gold for weddings or festivals is
likely to remain strong, as it is deeply anchored in cultural traditions, it is
unlikely to drive any sustainable recovery, especially given China's slowdown
and India's current account deficit. Therefore, the more volatile demand coming
from investment should be the key for a new phase of strength in gold. Looking
at the chart, we would wait for a capitulation or a base formation before
betting on a resurgence in investment demand, especially as gold positions are
far from historical extremes. For the time being, the big key support area can
be found between 1033 (March 2008 peak) and 1045 (February 2010 trough).
MIG Bank
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