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

REUTERS SHOWCASE

Earnings Season

Earnings Season

Reliance Q4 sales rise, refining margin narrows.  Read 

Literary Giant Dies

Literary Giant Dies

Nobel winner Garcia Marquez, master of magical realism, dies at 87.  Full Article 

Election 2014

Election 2014

India holds biggest day of voting with BJP gaining strength  Full Article | Full Coverage 

Insider Trading

Insider Trading

Ex-Goldman director Gupta starts prison term on June 17.  Full Article 

Market Eye

Market Eye

Sensex jumps 351 points, snaps 3-day losing streak  Full Article 

Expansion Plans

Expansion Plans

Reliance Industries, HPCL Mittal plan refinery expansions.  Full Article 

S&P on India

S&P on India

S&P: India's ratings to depend on next govt econ, fiscal policies.  Full Article 

Ambitious Aim

Ambitious Aim

In green car race, Toyota adds muscle with fuel-cell launch.  Full Article 

Bond Market

Bond Market

A star abroad, RBI boss riles bond traders at home  Full Article 

Reuters India Mobile

Reuters India Mobile

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