BREAKINGVIEWS: Gold's bull run is tired but maybe not over

LONDON Thu Feb 23, 2012 4:27pm IST

A shopkeeper displays gold jewellery inside his showroom in Jammu September 15, 2008.REUTERS/Amit Gupta/Files

A shopkeeper displays gold jewellery inside his showroom in Jammu September 15, 2008.

Credit: Reuters/Amit Gupta/Files

Related Topics

Stocks

   

LONDON (Reuters Breakingviews) - Gold, it seems, can have it both ways. Its latest charge to a three-month high is ascribed both to relief at a Greek bailout and to fear it won't work. The bubbling precious metal has become simultaneously a speculative, risk-on play and a safe haven. That duality should keep the gold bull alive for a little while yet.

The golden beast is showing signs of fatigue. A three-month high leaves it 8 percent down on its September peak. Demand for gold rose in 2011 -- but by just 0.4 percent on 2010. Ultra-high prices are weighing down jewellery consumption. India, traditionally the largest consumer of gold for jewellery, imported 44 percent less gold in the fourth quarter of 2011 than a year earlier as the rupee plunged. China overtook India as the biggest gold importer, but its demand was up a meagre 3 percent year-on-year.

Weakness in jewellery demand is in fact not new. It is down by a quarter over the past decade, from an annual average of 2,587 tonnes in 2002-04 to 1,931 tonnes in 2009-11. Extremely high prices are deterring consumers. Industrial demand has been stable, at about one tenth of the total. But it is demand for gold as an investment that has soared, rising from just 341 tonnes in 2003 to an annual average of 1,604 tonnes in 2010-11.

Sustained dollar weakness, zero interest rates and abundant money printing by the U.S. Federal Reserve have all boosted the appeal of gold and reduced the opportunity cost of holding it. The September price peak of $1,920 per ounce coincided with fears of a euro zone collapse and additional money-printing in the United States. When paper money cannot be trusted, gold seems priceless.

Normality is the gold bull's enemy. Better American data, which has reduced the likelihood of more quantitative easing, and a firmer dollar are negative signals. Rising U.S. interest rates will eventually be the precious metal's nemesis. But that day is still distant and euro zone crisis risks intensifying again, sending investors gold's way. Gold's bull run is tired but not quite over.

CONTEXT NEWS

-- The spot gold price rose to a three-month high above $1,780 per ounce on February 22. U.S. gold futures for April delivery settled up $12.80 an ounce at $1,771.30, according to preliminary Reuters data. Traders judged that gains in crude oil and grain prices and rising geopolitical tensions between Iran and the West lent support to gold.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

(Editing by Edward Hadas and David Evans)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Markets

REUTERS SHOWCASE

Segway in India

Segway in India

Segway’s India business pegs hope on tech-savvy Modi  Full Article 

Power Outage

Power Outage

Mumbai hit by power cuts  Full Article 

Commodities

Commodities

Gold imports, premiums to jump on festive demand - top refiner  Full Article 

Economic Worries

Economic Worries

Pakistan's promises to IMF in doubt as protests sap economy   Full Article 

Islamic Finance

Islamic Finance

Basel III deposit challenge looms over Islamic banks   Full Article 

Antitrust Probes

Antitrust Probes

U.S. business lobby says concerned China antitrust probes unfair.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage