Nobody's going to change the mind of gold bugs, but after
recording its 12th consecutive yearly gain, gold's bullish run
may be set for a pause. Here are eight reasons that put gold's
rally at risk:
1) Risk Appetite is Increasing
Since the beginning of the year, the CBOE Volatility S&P500
Index (^VIX) has fallen an incredible 37% as risky investing
surges. Gold (NYSEARCA:GLD), U.S. Treasuries (NYSEARCA:TLT) and
other "safe-haven" trades have slumped in value. Meanwhile, higher
risk assets like emerging market stocks (NYSEARCA:VWO) and small
cap stocks (NYSEARCA:IWM) have climbed.
2) Physical Demand is Sliding
Although Q3 2012 gold demand was up 10% up from the previous
quarter, it was down year-over-year. In value terms, demand was
worth $57.6 billion or 14% below Q3 2011. Investment demand was 16%
below the exceptional levels witnessed in Q3 011, led by a steep
drop in the bar and coin segment.
3) End of QE
Gold rallied around 70% from Dec. 2008 to Jun. 2011 during the
Federal Reserve's first two rounds of quantitative easing (QE). But
how would it react without QE? All things must end and QEternity
may be in its final inning. Several Fed officials, according to
minutes from last month's meeting, want to stop asset purchases,
citing worries about the Fed's bloated balance sheet and financial
stability. Ending QE could put downward pressure on gold.
4) Overly Bullish Gold Sentiment
The Bloomberg News poll of traders, investors, and analysts
predicting higher gold prices (NYSEARCA:IAU) are near 75,
which puts it in elevated territory. Over the past year, we've
experienced better upside trades in gold prices when bullishness is
below 50. (see chart below)
5) Rising Speculation
Open interest data from the U.S. Commodity Futures Trading
Commission shows gold call option buying is outpacing bearish puts
by roughly double. When the crowd bets heavily in favor of a
certain trade, usually they're wrong.
6) Central Banks are Slowing Gold Purchases
Central banks continued to purchase gold in the third quarter, but
at a slower pace; demand of 97.6 tonnes, worth $5.2 billion
accounted for 9% of overall gold demand during the period.
Diversification of reserve assets remains the driving force behind
gold investments by central banks.
7) A Break in Momentum
Gold registered its 12th consecutive yearly gain in 2012 by rising
7%. That's an incredible streak - its best since 1920. But in
reality, gold has been in correction mode since September 2011.
It's unrealistic to expect gold prices to register yearly gains
indefinitely.
8) Higher Gold Taxes in India
Bloomberg reports
that India may increase taxes on gold imports to help cut its
current account deficits, says Finance Minister Palaniappan
Chidambaram. Why does it matter? Not only is India the world's
largest buyer of gold bullion, but less than 1% of the world's gold
is mined there. Taxes could eventually be raised from 4% to 6%.
What type of impact would this have on gold prices?
Here's another interesting fact: On a relative performance basis,
we continue to see gold underperformance versus other
major asset classes, including U.S. stocks (NYSEARCA:DIA),
real estate (NYSEARCA:VNQ) and even European stocks (NYSEARCA:VGK).
Is relative underperformance a sign of strength or
weakness?
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