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Madras Bank

Will the bull run in gold continue?

Saturday, August 25, 2012, 11:24 [IST]

Gold futures in India touched a historic peak this week, on sustained buying support and largely tracked global markets. Here are a few factors that could see further momentum in the precious metal.
Hopes of easing in Europe and the US
Hopes of further quantitative easing in the US or Europe could see fresh buying in the overseas market, which could further push the prices of the precious metal. 
How the European Central Bank and the Federal Reserve manage easing measures would largely determine the trend of the metal in the next few weeks.
Rupee behaviour
If the rupee gets stronger, as it has been showing signs of, domestic gold could get cheaper, as the currency is one of the two important variables that determine the price of domestic gold. Over the last few days, the rupee has rallied in line with strongequity markets. 
However, should the rupee lose ground against the dollar, brace yourselves for a further rise.
Domestic consumption
India's is one of the largest consumers of gold and domestic consumption also drives international prices. India's investment and jewellery demand for Q2 2012, fell to 181.3 tonnes, down from 294.5 tonnes in Q2 2011, the World Gold Council has stated in a release.

At 56.5 tonnes, investment demand was less than half the level in Q2 2011. Indian jewellery demand also experienced a noticeable drop to 124.8 tonnes, down 30% year-on-year from 179.5 tonnes.

If the falling consumption trend continues do not expect a substantial bull run in gold.

International economic environment

A dismal economic environment would continue to see investors parking money in gold, which has over the last couple of years, easily beaten returns from risky assets including equities. However, if the economic environment improves, be rest assured that equities would outperform gold in the short run at least. 

However, the odds are heavily in favour of the economic environment globally being dismal at least for the next couple of years.

All said and done, there has been a significant rally in gold in the last few years and the near historic highs, would ensure that substantial gains are capped at least in the short to medium term.