Are you baffled by Gold`s fall?

Chart: Gold lease rates have moved into negative territory

Source: Bloomberg

We believe that the recent fall in gold is probably more due to lack of catalysts that could have helped push it to record highs. In simple words, it is a move towards a more rational behavior despite the ongoing crisis. We’ve been used to seeing monetary interventions by central banks through monetary infusions to resolve the underlying issues and attempts to promote growth in such uncertain times. But this time, the market forces have pressured central banks to not bow down to such ill conceived notions.

The reluctance of central banks (although forced) to avoid further easing measures have in the short term removed the catalysts for gold prices to increase further. Markets were expecting an announcement of QE3 (Quantitative Easing) soon, which did not materialize even after the recent FOMC (Federal Open Market Committee) meeting. In the light of intensification of the Euro zone crisis, there was a view that the ECB (European Central Bank) would start printing to paper over the debt problems, but that has not taken place as yet. This reluctance has triggered a fall in gold prices.

Reasons for Gold`s decline

Some are even worried about gold’s recent tendency to move along with risk assets. Yes, it has been moving along, but the interpretations are different. Risk assets are selling off on account of worries over low growth that would ensue as debt deleveraging plays on and until the central banks do not get over their reluctance to intervene and promote growth by way of monetary infusions. Gold has been declining on account of recent hesitation by policy makers to jump start their printing press as envisaged by many. Technical sell offs, liquidity issues and Dollar strength are only exacerbating the decline.

We reiterate that it is highly likely that policy makers would switch on their monetary infusion engines at the first signs of growing deflationary threat, liquidity tightness or it may be a contagion triggered by European debt woes. The decline in gold prices presents an opportunity even if in the interim, to increase allocation to gold. It is also possible that gold prices fall further and hence investors can use such opportunities to reach their desired allocation levels.

The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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