Dip in demand: Global gold demand declined 11 per cent year-on-year to 1,085 tonnes in the third quarter of 2012, according to the World Gold Council. In value terms, gold demand was 14 per cent lower year-on-year at $57.6 billion and the average gold price of $1,652/oz was down 3 per cent on the record average Q3 2011 price.
Jim Rogers, chairman of Rogers Holdings, says gold prices have been correcting since September 2011 and the consolidation is likely to continue. Mr Rogers, who is bullish on agro-commodities, says gold prices have gone up for 12 years in a row so some correction should be expected.
Rising speculation: Speculative buying into gold has jumped -- the number of call options is more than twice the put options, according to the open interest data on the U.S. Commodity Futures Trading Commission. The increasing long position of speculators may result in a cooling off of gold prices, Mr Rogers says.
Last week, global investment bank Goldman Sachs lowered its price forecasts for gold in 2013, citing growing downside risks to the metal's price. The bank cut its 12-month forecast by 7.2 per cent to $1,800/oz. It also introduced a 2014 gold price forecast of $1,750/oz.
Risk appetite is on the rise: Gold remains the least preferred asset class from a one-year perspective, according to a majority of fund managers polled by ICICI Securities in November 2012. The Indian equity markets are likely to rise between 15 and 20 per cent over the next year, the fund managers said.
Increased retail participation in equities: Indian stock markets have been rising on the back of foreign inflows. Foreign institutional investors have pumped in more than $20 billion into equities so far. In contrast, domestic institutional investors have been net sellers in the markets. As the markets move towards a new high (6,357 on the Nifty), retail participation is bound to increase, shrinking demand for gold as an investment class.
Rebound in the rupee: Bank of America Merrill Lynch strategists see the rupee at Rs 53 compared to the dollar in March 2013. An appreciating rupee will make gold purchases less costly for Indian investors - as commodities are priced in dollars - and the returns for those who held gold in their portfolio will become less attractive somewhat.
Inflation hedge: Gold is a good inflation hedge in India considering its annual return of 11 per cent over a 40-year-period from 1970-2010. Return on gold has outpaced average annual WPI-based inflation in 34 years of the 40 years so far, according to Reserve Bank data. However, India's inflation may have peaked off making gold less attractive as an inflation hedge.
Economy has bottomed out: India's economy may have bottomed out. Factory output has picked up and inflation and interest rates may soon start to decline creating a strong investment climate. This in turn will lead to faster growth and a rise in risk appetite giving better avenues to investors to park their money. Besides, the government and Reserve Bank have been urging investors to deploy capital in instruments like stocks and mutual funds, rather than keeping them in idle assets like gold.
Global factors: On Wednesday, the Federal Reserve announced another round of quantitative easing. The U.S. central bank will buy $85 billion worth of bonds per month until the unemployment rate falls below 6.5 per cent. The decision led to a rise in gold prices, but not significantly. Analysts say Fed's money printing is increasingly having limited impact on asset prices.