On its own gravity!

Gold is an asset class on its own and is the only commodity cum currency that has delivered positive annual returns for a decade now. In the last five years the yellow metal has generated a CAGR of 19.66%. Unlike the exponential return seen in its earlier bull market (as in early 1980s), it now seems, for the time being at least, the reservoir of reserves from this asset class is exhausted as no asset classes can give you positive returns perennially. The water has to sink low enough and then start to refill back. It may take few months or quarters for the lakes to refill back to reach an overflow level.

When the asset allocation pattern changes, the fund flows into USD and other developed equity markets; and gold will fall on its own gravity given the unprecedented rally witnessed all these years. This of course would be a short term phenomenon and the yellow metal will eventually rise. In today’s world, gold is viewed as a currency and as the USD strengthens for whatever is the reason, the XAU/USD shall drift down, implying lower dollar denominated gold prices.

Indians have accepted higher gold prices; but don’t like the volatility in prices. Jewellery consumption in India in 2011 has been affected by concern over inflation and the level of the rupee and will have an impact going into 2012. India and China shall continue to be the big markets for precious metals jewellery segment in 2012. But, higher gold prices, an uncertain economy and fluctuating exchange rates (read dollar strength) will continue to affect buying habits. Nevertheless the recent hike in import duty and tariff value in India will only arrest the fall and shall not stop it. This does not mean gold is on the path to a long term bear market. All it gives is a pause on a long marathon that started way back in 2001. The rally will continue for many years and gold is just refilling its reservoir and its energy for the best of years that is yet to come.

For those of us who have seen gold from close quarters now knows for a fact that we are entering an interesting phase on the long Bull Run.