Lust For The Yellow Metal

A weak dollar and a weaker US economy are forcing investors to rush towards gold as a safer investment, reports SHANTANU GUHA RAY

IT’s NOT a new, but a renewed gold rush. Battered by low stock returns and poor bank interest rates, Indians are returning to their favourite investment safety net: gold. Last Tuesday, India's gold futures traded within striking distance of an all-time high of Rs 14,000 per 10 gms, on strong overseas. This, even as a stronger rupee kept the gains low. But the high bar was a clear indication of the way the gold market is likely to go: up.

January 25 was a historic day for the world’s largest gold market, as spot prices surged to Rs 14,150 per 10 grams. Market analysts are unanimous that prices are reaching such dizzy heights because of the continuing rise of the yellow metal in the global market.

There was logic in the rise. “Globally, gold prices are picking up and there are enough signals that it could actually cross the $1,000 mark per ounce,” Anjani Sinha, CEO and MD, National Spot Exchange Limited (NSEL) told TEHELKA. Strangely, figures on gold imports into India are often unavailable, with even the commerce ministry unable to offer a final figure. But global consultancy GFMS maintains that India imported 720 tonnes in 2008, compared to 862 tonnes the previous year. It also says that the amount could have surpassed the 2007 figure by nearly 50 percent if volatile market conditions had not rocked the Indian bourses towards the end of 2008. “Gold is definitely doing some catch up in the Indian markets because the weaker dollar has enhanced the metal’s investment appeal,” adds Sinha.

Analysts agree that the rise in price is because of its image as good security. “In the longer run, gold works for everyone because it is seen as a safe-haven asset but eventually, I expect the metal to correct to Rs 14,025 because of the currency (rupee) appreciation,” says Gnanasekar Thiagarajan of Mumbaibased Commt rendz Research. Amrut Deshmukh of Way 2 Wealth Securities feels the rally could, actually, continue and eventually end at Rs 15,000 plus. “This is a positive trend for gold trading,” he adds. Pradeep Unni of Richcomm Global Services agrees this is because of the underlying bullishness in international markets. “The chances of the prices rising beyond the Rs 15,000 mark cannot be ruled out,” he says.

ON THE flip side, high prices have also prompted some people to sell old jewellery, says Suresh Hundia, president of the Bombay Bullion Association. “There are scores of people at the shops. There is nearly 100 kg of scrap gold in the Mumbai market,” he says, adding, however that it would be wrong to take sale of old gold as a market indicator. “Indians will seek more gold this year,” he says.

Hundia found support from Ajay Mitra, managing director of the World Gold Council (WGC) in India who told Bloomberg that financial uncertainty will continue into 2009 and gold will outperform other commodities and investment instruments. “India’s demand will be robust this year, as the nation will have more dates in its traditional wedding season. Gold will remain a safe bet especially at a time when other investments aren’t doing well.”

Bullion traders said investment in the SPDR Gold Trust, the biggest exchange-traded fund, rose 4.7 percent last week, to a record 832.6 tonnes. In 2008, gold climbed for the eighth year as US equity and commodity indices lost more than 30 percent of their value.

This rush towards gold as investment option is not just happening in the Indian markets: gold is proving popular in the international bazaar as well. Last week, it touched a four-month high of $903.50 per ounce, before ending at $895.30 an ounce for January contracts, a high that has not been witnessed since October last year.

The yellow metal also touched record highs in euro (685.70 euros an ounce) and the pound (£648.51 an ounce) last weekend. Global analysts say that the current gold movement looks a little delinked from that of the dollar, whose strong position normally puts pressure on the metal.

To buy or sell? Gold bars (above) are in demand worldwide; (below) Indians are both buying and selling the yellow metal Photo: AP

But the Asian and European currencies are in a weak position because of the crisis in their banks — financial institutions have reported more than a $1 trillion of write-downs and credit losses — that has forced many buyers to opt for the yellow metal instead. The gold gain has also been attributed to the problem in Indo-Pakistan relations and the strafing of Gaza by Israeli defence forces. Traditionally, gold is seen as the safest bet in war zones.

But the million dollar question is still whether the metal will touch the $1000 mark again? Many say the fortunes of crude and metals will depend on what steps new US President Barack Obama takes to revive the US economy. More important, they will depend on how the economy responds to the stimulus packages. Among other things, gold, say experts, will definitely be impacted by the gyrations of the dollar.

The Guardian newspaper quoted John R. Ing of Maison Placement as saying the world — despite being awash with dollars — could not find an alternative investment and was ,therefore, looking to gold.

Another London daily reported how one of the city's most established gold bullion dealers, ATS Bullion, had lines outside its offices tucked away by the entrance of central London's Savoy hotel. Another bullion dealer, Baird & Co, said business jumped 40 per cent in the same period — January — and it was inundated with so much demand for gold bars that it could only take orders from its best customers.

“Devaluation of the dollar is around the corner and it is better to hold gold than cash. That gold is being hoarded like cash is evident from the fact that the American gold eagle coins in quarter and half ounces are currently unavailable,” he told the newspaper. The WGC has already reported a $32-billion demand for gold in the third quarter of 2008, attributing the rise to physical demand. Clearly, gold will continue to remain attractive for some time yet.