With the market still trying to evaluate the timing of the Federal Reserve’s planned phase-out of quantitative easing and the economic headlines from China worsening by the day, many investors wonder if the uncertainty is bullish for gold–a commodity that tends to do well when the economy weakens and investors flock to perceived safe havens.
Although the precious metal remains a solid long-term hedge against the vagaries of the stock market and global economy, gold prices also reflect changes in the outlook for the US economy, which remains relatively healthy.
A rally in gold prices also faces several short-term obstacles, including a collapse in India’s gold imports.
The Indian market had absorbed about 30 percent of the world’s gold production, but the government recently raised the import duty on the metal to 8 percent from 2 percent and banned consignment sales of gold to domestic banks–the main conduit of physical gold into the country. Under these arrangements, Western banks transfer bullion (but retain the ownership of the gold) to Indian banks that sell the precious metal to jewelry makers, traders and other customers. After the sale, the bank that consigned the gold receives their share of compensation.
A wave of gold sales by popular exchange-traded funds (ETF) has also buffeted the market for the metal. At the end of 2012, these investment vehicles were the third-largest holders of physical gold, trailing only the US and Germany; today, ETFs’ steady gold sales have lowered these funds to sixth on the list of top institutional gold holders.
Until new demand outlets emerge, expect gold prices to remain under pressure. India’s gold demand may improve in the beginning of the fourth quarter, the start of the wedding and festival season–a period when purchases of the precious metal usually receive a boost.
Copper prices, on the other hand, could surprise to the upside, with the Chinese market restocking recently depleted inventories. The premium that merchants can charge on copper deliveries in Shanghai has also increased, rising from about US$55.00 per metric ton in February 2013 to about US$180.00 per metric ton.
Investors seeking exposure to trends in the copper market and rising demand for vital resources over the long term should consider a stake in Freeport-McMoran Copper & Gold (NYSE: FCX), a blue-chip operator that sports a dividend yield of 4.5 percent.