Why the gold will not undergo a burst?

Gold prices have come down notably in the international market triggering gold crash expectations. Prices are now lower than $ 1500 per ounce compared to its September 2011 peak of US$1,924/oz. The new declining trend is attributed to the expectations of a gold sale by the Cyprus government in the open market.

Gold market was searching for an immediate reason to make a correction downwardly because of the gradual disappearance of some of the factors that helped the gold price to rise. One such factor was the settling of the US fiscal cliff.  Besides, Europe is also searching for real solutions to solve their instability. Hence, the Cyprus gold sale rumor has activated the downward correction of the yellow commodity.

But, Cyprus central bank’s gold holding is a meager 15.5 tonne compared to the RBI’s holding of 557 tonnes. This means that gold price may not witness a slump of significant scale even if Cyprus sells half of its gold in the open market.

Few years back, gold prices have not responded much to the IMF sale of around 200 tones of gold to India in 2010.  The IMF gold sale was between two big institutional holders with no repercussions in the open market. Understandably, the open market price of gold didn’t responded much. Now, the interesting scenario in the Cyprus case is that sometimes the sale may occur in the open market so that Cyprus can get the maximum value.  

In this case, gold price may come down a bit more. But still a fall to the size of a burst is a distant possibility even in the medium term. Unless the world economy or major economies show strong signs of recovery, gold may continue as an investment asset. A major dampener on gold price is the US settling its fiscal cliff. On the other side, if the EU is able to execute its stabilization programmes successfully, investors may exit gold, but gradually. Good things are slow to come in the world economy. Hence, the fall of gold may be gradual. But, one thing is almost certain, without any immediate economic crisis, gold price may not return to its recorded peak. The remaining journey is downward.