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Is the gold rally over?
Tue, 19 Jun Pre-Open

Gold, as an asset class, is inversely correlated to equities. It is not only a safe haven but also provides an hedge against inflation. Thus, people flock to buy gold to preserve their wealth in times of adversity. Now, considering the current global turmoil the demand for gold has increased considerably. Thus, gold has outperformed equities and delivered higher returns if the recent history is considered.

But is this performance sustainable in the near future as well? For that to tell, first we need to know the demand drivers of gold.

As noted previously gold is a safe haven. And considering that the Eurozone crisis might peak in the near future it may trigger a gold rally. Also, in the current environment faith in paper currencies has started dying down. That's because most countries have indulged in quantitative easing exercises to stimulate their economies. Artificial money pumping can stoke inflation and thus paper currencies can lose value in future. Thus, with both equities and currency losing sheen in the current environment gold becomes an inevitable choice for investment.

However, for how long will this bull-run last?

Strengthening of the US dollar has started impacting the gold demand to a certain extent. Also, considering that the Greece elections have been positive (pro-bail out parties won) the situation in Eurozone and equities in general has improved a bit. Greece's willingness to stay anchored to the Euro has reduced the risk of contagion that could have erupted from its separation from the Eurozone. This has reduced the risk aversion towards equities.

Thus, whether the gold rally has legs to carry itself from here on depends on the global economic environment, movement in the US dollar and investors' perception towards risk.

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