Investors who invested in gold at the start of 2011 has pocketed very handsome return in 1 year as the yellow metal has delivered 32% absolute return in Indian currency in 2011 in contrast to equities which delivered negative return (-25%) in India.
Now the million dollar question is Can gold, which has been in solid bull market since last 10 years, deliver superior returns in 2012 as well?
To answer this question lets look at both the fundamental and technical aspects of the metal.
1) The global physical demand (consumption led demand) for gold has come down significantly in past 1 year due to unaffordable high prices. Gold imports by India, the world's top consumer, plunged 56% to 125 tonnes in the fourth quarter (Oct-Dec) of 2011 (the peak festive season), cutting full-year imports by 8.4%. India imported about 878 tonnes of gold in 2011, down from 958 tonnes in 2010 according to Bombay Bullion Association.
2) The jewellery sales have come down significantly and the share of investment demand in total demand has risen to 35% in 2011 compared to 22.6% in 2010 which clearly suggest that fundamentals of gold has deteriorated significantly due to poor consumption led demand.
3) High gold prices, coupled with very high interest rates and tight liquidity in India have led to Indians selling some of their gold coins and bars which in turn as increased the supply situation in India.
4) Due to year on year increase in gold prices since last 10 years, the old as well as new mining companies are mining more gold than ever which is leading to an oversupply situation for the metal globally.
5) US economy is expected to do much better in 2012 which will make US dollar expensive vis a vis other currencies and the counties which diversified to gold as alternative reserve will again shift focus to USD reserve. Hence the physical demand from countries reserve banks will also be low in 2012.
6) Gold being a non productive asset has very thin margin of safety in case the actual consumption led demand comes down.
1) The gold price has corrected by around 20% from the peak of $1920 in USD terms.
2) The gold chart is making lower tops and lower bottom since past few months.
3) The band in which the gold price was largely moving (as shown in chart below) seems to have been broken on the downside. If gold price continue to stay below $1600 for next few days the violation of the band would be confirmed and the gold price could start heading southward
So considering the above factors it seems that the yellow metal could loose some of its shine in 2012 and might not be a good asset class for investment this year.