As a general dilemma, it is difficult to
forecast the future. A few weeks ago, forecasters predicted that Brazil would
win the World Cup, and as a matter of fact they badly lost against Germany. In
recent weeks it has been easy to find bullish comments related to gold based on
inflation worries, European banking risk, and Iraq. The question now is, should
we consider gold over stocks?
Since the past two days (14-15/07/14) gold
declined approximately 36.64% and 21.60% correspondingly, accounting record volumes
traded. Its biggest decline in almost seven months as Portuguese banking
concerns eased, Israel ceased fire, equities advanced and dollar strengthened. The
Fed suggested an improving US economy and the fact that they might hike rates
in 2015, which is sooner than expected. Meanwhile, The S&P’s 500 jumped up
after Citigroup, JP Morgan, Well Fargo and Goldman Sachs reported profit that exceeded
analysts' estimates.
As seen in the chart below, investors have
favoured stocks relative to gold.
Bearish Outlook for India’s Demand for Gold
India is considered to be one of the biggest
consumers of gold, but we believe physical demand will remain short. Important
to note, that the country has decided to maintain a 10% import duty on gold and
silver, which will further have a dampening effect on future gold demand
expectations. Also, with a monsoon season coming up indicates a low average
gold demand from India.
Besides, last week’s European driven pullback in
stocks, the longer-term outlook for equities is still favourable. Fed is likely
to maintain low interest rate to revive inflation. Thus, US equities will
continue to rally. The S&P 500 has been hitting records on expectation that
the Fed has no incentive to end its ultra-loose policies. In fact, it is more
prone to wait until inflation picks up and the housing market recovers
sufficiently, the same goes with the labour market
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