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Nov 16, 2011, 11.44 AM IST | Source: Moneycontrol.com

Gold, certainly getting very precious...

The mantra for gold investment has become pretty clear… "Any positive news that hits the market, we get an opportunity to Buy at dips, but incase of negative news we see Buying at CMP” this is the trend followed in the market so far.

Gold, certainly getting very precious...
Pranav Mer, Senior Analyst - Commodities, Mangal Keshav

The mantra for gold investment has become pretty clear… "Any positive news that hits the market, we get an opportunity to buy at dips, but incase of negative news we see buying at current market price" this is the trend followed in the market so far.

Although prices of gold have scaled above Rs 29000 per 10 gm in the Indian markets, surged past USD 1,800 per ounce in the international markets, but the trend still looks very much positive with every dip seen as a buying opportunity to accumulate. Gold has been the best performer among all the asset classes with positive QoQ returns post 2008 crisis and have rallied more than 10% in the current quarter so far. Gold's current bull rally has been supported by strong price driver, which are away from the technical factors…We call them the fundamental price drivers. Some of them are discussed below:

Investment and jewellery demand: With increase in number of gold backed Exchange traded funds ( ETF 's) around the world, spread of knowledge among investors due to increased literacy, high disposable income, etc have helped growth in the investment demand, especially after the 2008 debt-crisis.

ETF's provide the facility to invest in small quantities (as low as 1gram of gold), that are affordable to every participant in market.  Majority of the participants includes retail investors, hedge funds, pension funds, etc. Physical demand too remains robust be it for gold coins or bars or the any kind of jewelry, especially from India and China.

Economic uncertainties

Inflation: High inflation levels have become a major concern for central banks in the global market and especially in the emerging economies, mainly due to expanded money supply in the form of bail-out packages, stimulus, etc. Although strong steps have been initiated by the concerned central banks but no major impact is seen & inflation still remains at elevated levels. Historically, gold is considered as a best hedge against inflation.

Low interest rates: Absence of alternative safe investments has pushed investors towards gold with interest rates close to zero among majority of the developed economies and high volatility in the equity, currency & commodity markets, have added further support to the gold’s safe haven demand.

Debt crisis: This has been the major recent factor that has driven gold prices higher, first it was the United States raising its debt ceiling & then hit by a credit rating downgrade… now, it's the European Union, which is facing a tough job in baling out its members from increasing sovereign debts.

Proposal for 50% write-off in Greece's debt has been recommended while other nations like Italy, Spain, Ireland, Portugal and Belgium are already burdened with high debt levels, seeking immediate steps today or tomorrow. Any strong measure taken by the EU is likely to impact the union's strongest economies i.e. France & Germany. But the big questions remains, where is it going after Europe, is it Asia??

Apart from the economic factors discussed above, certain factors such as high unemployment, central bank actions, slowing industrial & economic growth, low consumer confidence in the west, etc have remained supportive to gold current up-trend.

High crude prices: Oil prices are again moving close to USD 100 per barrel and with Brent prices already above USD 110 per barrel, are again raising alarm over the impact it could have on the balance sheet of major importing nations while the growth of global economy continues to slow with no major signs of revival seen till date. High energy prices leads to increased input cost, which is turn increases the cost of final output, ultimately leading to high inflation and high debt levels, indirectly making gold as the best alternative for savings.

Dollar factor: The US dollar is a global accepted currency, with most of the currencies directly pegged to the US dollar in terms of central bank reserves, international transactions, quotes, etc. However, declining value of the US dollar against its major trading partners after 2008 crisis, has raised questions over dollars future as an international currency while many experts seen talking about bringing back gold standard.

There has been many factors responsible for dollar decline, right from debt crisis to high unemployment rates to slow pace of GDP growth to fragile housing market, etc all in the US. Historically, the value of US dollar is inversely proportional to that of gold (i.e. Dollar up - gold down, dollar down -gold up), but the impact is not always strong, as there are many other economic & non-economic factors outside the US.

Best alternative investment (compared with equities, property markets, etc): In the current market scenario, where there is high amount of uncertainty in the stocks & bonds, currency markets are highly volatile (both reacting swiftly to the economic activities), property prices at sky highs & out of the reach of small investors. So, for them gold remains the best alternative, as it can be purchased in small quantities and accumulated.

Central bank gold reserves: According to market reports, central banks across the globe have remained net buyers of gold, loosing their confidence in the paper money after 2008 debt crisis. Asian central banks have remained the major buyer's of gold lead by India and China. And, with regards to central banks gold sells in the open market, most of the countries are happy to keep their holdings in vault considering the market situation and uncertainty in the currency markets.

Currency market volatility: High volatility is seen in the currency markets with every central bank trying to keep its currency stable i.e. from appreciating/ depreciating sharply with monitory policy actions, intervening in the markets, etc.  In addition to this, changes in the macros economic factors are being closely watched by market participants, who are continuously increasing their bets on high gold prices.

These were some of the demand factors, but on the Supply side, it has been noticed that supply growth has not kept its pace with the demand growth, mainly due to lower output in South Africa, one of the world’s largest producers of gold. Also China & Australia overtook South Africa as the world’s largest producers of gold in 2007. Although supply has been increases steadily, but less is seen supplied to the market as central banks of respective producing countries are purchasing their domestic output and adding the same to their reserves.

Increased demand for gold and its products from every class of investors, for diversifying their portfolio, managing the long-term returns and a store of wealth. The long-term picture of gold certainly looks positive with every dip seen as a buying opportunity to accumulate, with ongoing uncertainty in the global market in terms of macro-economic fundamentals, debt issues and growing investment demand even at current higher prices.

READ MORE ON  Master Your Money, MYM, Pranav Mer, gold, ETF,


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