Despite the notable fall in gold prices in recent times, the long-term outlook for the commodity is still positive with prices likely to have bottomed out and shift direction in future, a report by a research analyst has outlined. According to Kavindu Ranasinghe, analyst attached to Softlogic Equity Research, global gold prices are heavily influenced by exchange-traded fund (ETFs) and gold futures as price influence from physical gold demand is lagged due to the complex nature of supply chain.
“Our Commitment of Traders (COT) analysis indicates that a market extreme could be on sight. On a momentum note, Speculators increased their long contracts cf. total contracts (long plus short) to 56.0% in July 26, 2013 cf. 54.0% in July 16, 2013 after nearly four months of downward trend in the ratio,” Ranasinghe said in a Special Report titled ‘Gold, a golden opportunity?’.
In 1Q2013, demand for gold dipped by 13.0%YoY owing to considerable net outflows from gold ETFs. This speculative shorting was associated with diminishing value of gold as a hedge against inflation as quantitative easing programs in U.S did not trigger any hyperinflation. In addition in 2012, moderate growth levels recorded in China and India, the world’s largest importers of physical gold, hampered the demand for physical gold.
Furthermore, adding to the fiasco, as the speculation on cash-strapped European Union governments’ such as Cyprus might liquidate their gold reserves had a spiral effect and rattled lots of market participants.
He noted that even if the speculative shorting of gold continues, it’s quite likely that gold which were previously held in the ETFs would be absorbed by Asian markets.
“However, speculative shorting seems to be at an extreme level at based on our COT analysis. Nevertheless, many analysts forecast including World Bank tends to support the gold at the current prices although it might not reach the previous peaks in the short-run,” he noted.
The report said it should be noted that in 1Q2013 investment demand for gold declined by 49.0% of which the majority of the fall was accountable primarily by the Gold ETF (Speculators) which, in fact, outweighed the surge in demand for physical demand for gold bars and coins.
“Although ETFs represented a small proportion of gold demand (approximately 6.5%) the ETF market and the future markets have a notable impact in the prices of gold spot prices and the volatility in the prices. However, in contrast the physical demand for gold has been robust in 1Q2013,” the report highlighted.
Analyzing the CSE counters to watch out for, the report said that Sampath bank, LB Finance, Pan Asia Bank and Hatton National Bank had noteworthy exposure to pawning.
“Hence it’s possible these companies record an impairment provisioning in coming quarters which could negatively affect the bottom line. However, we expect global gold prices to stabilize and yield investment opportunities for investors to accumulate value counters at bargain which might result in knee-jerk price reactions in some counters,” the report said.
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