U.S. CMX gold futures for February 2013 (GCG3) delivery settled at $1660.1 on Dec. 21, 2012, which is the lowest number since Aug. 30, 2012. Prices for physical gold have been rangebound since October -- i.e., post-consolidation of the August to early October rally. However, a bullish trend in ETFs can be seen with steady buying interest across the ETFs. SPDR Gold Trust ETF (GLD), although seeing a steady fall in price over the last few months, has had a huge increase in trading volume as the price has gone down (or it may be the other way around).
The overall performance suggests that gold is struggling to attract sufficient fresh interest to drive the bull market. The reasons for recent weakness in bullion have been encouraging economic data from the U.S. and China and a credit rating upgrade for Greece. Moreover, gold has moved sideways over the past 15 months, which has kept a sizable population of investors away from the market. There has also been some profit-booking ahead of Christmas and New Year's holidays.
Looking at the buying pattern of U.S. CMX gold futures, we deduce that investors are unsure of the direction of bullion prices in the short term -- i.e., the two- to three-month horizon. For February 13 contracts, there has been increase in buying of $1,750 calls (GCG3C $ 1,750), a slow buying in $1,700 put open interest (GCG3P $1,700), and buying of $1,570 put open interest (GCG3P $1,570). This buying pattern could be due to continued uncertainty over the fiscal cliff.
However, I am bullish on gold for 2013. Gold prices could sell off further in the short term if U.S. nonfarm payroll data surprises to the upside, or if better economic news comes out of the U.S. or China, or if there is a correction in Western equities. But any price weakness in gold would be short-lived as dips will attract bargain hunting and would prompt further buying.
There will be very good demand for gold in 2013 due to the following reasons:
- The Indian market has shown some signs of strength as the rupee has reversed a little of its recent weakness. Moreover, according to the Hindu calendar there are more auspicious days for marriage in 2013 compared to 2012, which may have positive influence on demand for gold in that country.
- If U.S. authorities fail to reach a consensus on the fiscal cliff before the deadline, it might support bullion.
- The first official Chinese inter-bank spot gold trade using the China Foreign Exchange Trading System cleared via the Shanghai Gold Exchange and went live on Dec. 3, 2012. Over the medium term, that development should boost liquidity and investment activity.
- A move to an unemployment and inflation rate dependent model for interest rate policy would allow the Fed to potentially extend forward guidance on exceptionally low interest rates out to 2017, which would improve demand for bullion.
- As the traditional currencies are being debased, more and more central banks are buying gold to diversify their portfolio of foreign exchange reserves. In November, South Korea bought 14 tons of gold. Other central banks that have bought gold over the past two years include Russia, Kazakhstan, Ukraine, Mexico, Bolivia, Thailand, and the Philippines.
Overall, although gold prices have touched bottom since the end of August 2012, there lies a buying opportunity in the bullion. In the short term, there are a few uncertainties that are keeping the prices rangebound, but in the long term the returns look promising. There are various reasons listed above that will drive demand in 2013. I believe this is the right time to buy gold either in physical form or using the ETFs. Buying gold futures with a two- to three-month time horizon could be another option to beat the short-term uncertainty and bet on the long-term potential of this precious metal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.