Wednesday, April 3rd 03:41 PM IST

Case for Gold 'more solid than ever' as 'profit takers' exit the market

# Gold  # Gold Market  # Gold prices  # Gold demand  

Over the past six months, the gold price has fallen by 4.5% at the same time as the MSCI World index of equities has gained 17%.

By Rob St George
Over the past six months, the gold price has fallen by 4.5% at the same time as the MSCI World index of equities has gained 17%.

Malcolm Burne, chairman of the Golden Prospect Precious Metals investment trust, conceded that it was ‘certainly understandable’ for investors to have sold out of gold and moved into stock markets through the period, following the metal’s 400% appreciation over the past decade.

‘However,’ Burne contended, ‘once the sellers and profit takers have been shaken out fully, the arguments for a new revival upwards are more solidly in place than ever.’

First, he pointed to resilient demand from central banks. In 2012 such institutions purchased 534.6 tons of gold, the most they have in 20 years.

Second, gold should benefit from its promotion to being classified as Tier 1 capital for other banks. The decision by the Basel Committee on Banking Supervision, an industry regulator, is an upgrade from the metal’s previous Tier 3 status, meaning it was valued at only half the worth of cash for banks calculating their capital adequacy ratios. The change should induce them to hold more gold in their reserves.

Burne observed that this move coincided with Germany’s repatriation of gold worth around 60 billion pounds from foreign vaults. ‘Whether this is an insurance against future currency crises or not,’ he remarked, ‘it has to be seen as hugely relevant in today’s era of monetary debasement.’

The inflation and currency devaluations propagated by such stimulus policies are considered supportive of gold prices. ‘There is nothing more that attracts buyers to gold than monetary depreciation,’ asserted Burne.

Finally, Burne supposed that proposals by the China Securities Regulatory Commission to permit gold-backed exchange-traded funds (ETFs) would draw more participants into the market and so buoy prices.

‘The new ETFs are expected to appeal to larger-scale investors such as institutional or sovereign wealth funds,’ Burne explained. ‘Even before they start up, the volume of gold recently traded on the Shanghai Gold Exchange reached a record level in the latter part of 2012.’
Courtesy: What Investment

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