Gold witnesses sharp sell off; is it time to invest? - Moneycontrol.com

Gold Update April 17, 2013 Gold witnesses sharp sell off; is it time to invest? Â Sharp sell off after multi year dream run After generating unprecedented positive returns for 12 consecutive calendar years, gold has surprised everyone by declining sharply by around 20% from its high of | 32800 per 10 gram in November 2012 in a span of five months. The domestic price of gold has been buoyed by a steady depreciation of the rupee against the dollar in the last couple of years. In dollar terms, gold has not generated meaningful returns in the past two years. Exhibit 1: Gold prices had dream run since 2001 Indian gold prices rose from 2001 to 2011 in line with

global prices. However, after that, while international gold prices remained stable till the recent correction, rupee depreciation has led to a sharp rise in Indian gold prices Source: Reuters, ICICIdirect.com Research Exhibit 2: Calendar year returns in INR terms Source: Bloomberg, ICICIdirect.com Research Exhibit 3: US$ INR movement since 2004 Analyst Sachin Jain Sachin.ja@icicisecurities.com Dipesh Dagha dipesh.dagha@icicisecurities.com Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd. | Retail Equity Research  Reason for recent correction • One of the main reasons for the recent correction in global gold prices is the confidence in the US economy that has led to investors shifting money from safe havens like gold to riskier assets like stocks. The US stock markets are currently trading at all-time high levels. At the same time, the holdings of the SPDR Gold Shares, the largest gold ETF in the world, have fallen 15% from their peak levels. At 1,154 tonne, SPDR’s gold holdings are at their lowest level since April 2010 • The rise of the dollar due to the economic crisis in Europe also resulted in prices being adjusted as it is denominated in US dollar terms. The dollar has also moved up on hopes that the US economy is emerging from its crises • Expectations of the US Fed withdrawing the stimulus soon, which would results in sussing of easy money that is currently available • News flow of Cyprus selling its gold reserve. Cyprus holds just 13.9 tonnes of gold. Speculation that Portugal and Italy may follow Cyprus in selling gold added to the negative sentiments. However, it is unlikely that Portugal and Italy will resort to gold selling to meet the fiscal deficit • The sell-off was seen across commodities including metals and crude oil prices as weak Chinese GDP raised concerns over demand • The news flows, as mentioned above, led to panic selling and speculative or hot money, which was chasing the rising metal got reversed  Technical View: May consolidate for long period around current levels International gold prices witnessed a sharp sell off after violating the lower band of past 18 month’s consolidation range below $1530. After recording an all-time high of $1920 levels during September 2011 gold prices have remained in a broad trading band between $1800 and $1530 levels in the last 18 months Meanwhile, domestic gold prices continued to remain in a rising trajectory till November 2012 and scaled...

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