Akshaya Tritiya Special Report on Gold

Monday | May 13, 2013

Content
Akshaya Tritiya Special Report on Gold Strategy/Recommendations

Prepared By Angel Commodities Research Desk

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Akshaya Tritiya Special Report on Gold

Monday | May 13, 2013

Akshaya Tritiya Special Report on Gold

Gold prices which enjoyed an uninterrupted rally over the last decade, declined sharply in the past few months, halting its northward journey. The yellow metal has lost its safe haven appeal on the back of improvement in the global economic outlook, thereby leading to a rise in risk appetite in the global market sentiments. For the first quarter of 2013, gold prices declined by 4.7 percent and plunged further by 7.5 percent in the month of April. On a year to date basis, Spot gold prices have declined around 11.8 percent. On the domestic front, prices fell by 12.8 percent on a year till date basis and dropped by 4.6 percent in Q1 of 2013. The recent (April) collapse in the gold prices was a result of a series of factors; the most important being fears that Cyprus and the other debt ridden European nations will be forced to sell gold from their reserves to fight the ongoing debt crisis. Further, it was observed that the investors are moving towards the riskier assets like equities and gold is behaving in an opposite direction. Decision from the major global central banks that they will continue with its loose monetary policy also exerted downside pressure on the gold prices. Further, a decline in the inflation rate of the major world economies acted as a negative factor for the Gold prices. Gold acts as a hedge against the inflation, so a fall in inflation adds downside pressure on the prices. Chinas Gross Domestic Product (GDP) also fell to 7.7 percent in Q1 of 2013 which led to slump in the prices as the country ranks second in demand for gold after India. On the consumption front, it is seen that overall demand for the gold is declining in India. India which is the major consumer of gold jewelry saw a slump in gold imports by 24 percent in Q1 of 2013. Even for the month of April, gold imports have declined by 25 percent which is less than 71 tonnes imported during the same period last year. Jewelry demand that contributed around 45 percent in 2010 and declined to 42 percent in the current year indicating slowdown in the demand for the yellow metal. India witnessed a drop in demand for gold by almost 12 percent in 2012. The nation contributed around 19.6 percent of the world gold demand at 864.2 tonnes from the total demand of 4,405.5 tonnes in the last year. The major slump in demand for gold was from bar investment which saw a drop of 17 percent in the year of 2012. Overall demand for gold fell by 1 percent in 2012 as against a rise of 1.2 percent for the year of 2011. The situation in the ETFs is even worse and liquidation continues in the Gold ETFs. SPDR Gold Trust, the worlds biggest gold trading platform has seen that gold holdings were at 1051.65 tonnes which is at the lowest level in last four years and has declined around 22 percent on a year till date basis, while for the year 2012, it had increased by 7.67 percent and ended at st 1350.82 tonnes as on 31 December 2012.

Outlook
In the immediate-term, support to gold prices will be seen especially as prices in the Indian markets could stabilize before taking a correction further. This is due to the wedding season and the traditional Akshaya Tritiya demand, during which investors and retail consumers in India prefer to make gold purchases due to the auspicious sentiment attached to it. Despite a pullback in imports of gold in India, demand on the physical front is continuing on account of attractive prices. Even the Chinese market is witnessing increase in physical demand, with scarcity of stocks adding as another support. Further, a large part of the demand in recent years is seen from central banks of developing countries which may remain intact. Over the medium term, gold is expected to witness a fall on the basis of declining status of gold as a safe-haven. In the current context, focus is shifting towards an improving US economy (with slowing unemployment rate being an important factor), a strengthening DX and expectations that macroeconomic conditions would change for the better. In a scenario where expectations are positive, investors are most likely to go in for high-risk investments, rather than looking at a safehaven asset. The supply-side fundamentals reveals that, if prices again fall close to the low levels as seen in mid-April, miners could take a backseat, thereby creating a supply-side constraint. If miners actually go ahead with this move, then gold prices could sustain, however a muted response from the miners could lead to further downside pressure in the gold prices.

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Akshaya Tritiya Special Report on Gold

Monday | May 13, 2013

Technical Outlook

On the above monthly gold price chart, we have seen that from the year 2004 to Nov 2012, gold prices were trading in a steady uptrend between the channel represented by upper line AB & lower line CD. In Nov 2012 Gold lost its steam correcting from high of 32464 levels to low of 25270 levels, a drop of 22% in 6 months and its biggest monthly drop since nd Oct 2010 and 2 biggest drop in 8 years bringing an end to an 8 year bull run. After trading consistently within an 8 year rising channel, the recent drop in Gold prices finally breached the lower boundary of the channel indicated by line CD. This should be seen as a warning indication of possible weaker outlook in gold prices in near term to medium term. This drop was accelerated in month of April 2013 where monthly candlestick made a near Open = High and closing with a long bearish candle (a bearish indication) and during this period price corrected by more than 8% in just 3 days. This indicates weakness and further downside can be anticipated. Gold monthly prices also breached 20 day EMA for the first time since a decade and is trading below it, indicating there may be room for more downside as prices continue to trade below 20 day EMA. On oscillators front, MACD cross over turned negative at start of 2013 and is declining consistently. During this same period RSI also started declining steadily with falling prices, pointing bearishness in price. Prices have a strong support at 23000 ($1230) levels and below that at 19500($1040) levels. Resistance is seen at 30500 ($1630) levels. Due to multiple factors indicating bearishness - breach of 8 year rising channel to downside, prices trading below 20 EMA, nd 2 biggest fall in 8 years and oscillators pointing lower prices, we are recommending to sell Gold on rallies for a downside target of 23600 levels.

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Akshaya Tritiya Special Report on Gold

Monday | May 13, 2013

However, on a lower side around 23,000 levels appears to be strong support level and price should bounce from these levels. Hence one can initiate a long position at these levels.

Strategy :- ( From Akshaya Tritiya 2013 to Akshaya Tritiya 2014)

Sell MCX Gold between 27,500 27,800, SL - 30,500, Target - 23,600 / 23,000. or Buy MCX Gold between 22,500 23,000, SL 19,500, Target 27,700 / 28,000.

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