Gold has started 2012 with a bang, with prices up 11% in January alone. Gold's recent rally was ignited primarily by the Federal Reserve announcing it would keep interest rates low until late 2014. With the Fed virtually saying it would try to create inflation, gold was off to the races.
Around the globe, inflation is outpacing interest rates, leading to negative real interest rates. As people's money in the bank become literally worth less, investors flock to a hard asset like gold to preserve their wealth. Many are expecting inflation to pick up speed as central banks around the world gear up to fight deflation with more money printing.
Bulls also point to 11 years of gold price gains and argue that gold's late 2011 massacre was a normal correction. Central bank buying has also been robust, with the official sector buying 430 tons of gold in 2011. Turkey and Russia comprised the lion's share of buying.
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India consumed only 878 tons of gold in 2011, a 8.4% drop from 2010. The Bombay Bullion Association believes that in the first quarter, India could import half of what it did in 2011. Indian demand has been ravaged by high interest rates and a devalued rupee, making gold more expensive to buy. High and volatile gold prices might also make it hard for India to ramp up its gold purchases despite its own recent rate cuts.
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