AZK/DEZ/MNG/NXG
It’s still a gold rush
Sandeep Singh With Monika Halan
Posted online: Sunday , February 26, 2006 at 1043 IST
Gold means different things to different people. For individuals, it’s an object of beauty. For countries, it’s an alternative currency to hold their reserves in, one that is usually more stable than paper currencies. For investors, it’s an alternative asset class, one that is a better preserver of value than any other and the best portfolio hedge in times of crisis. Says Sanjeev Agarwal, managing director, World Gold Council: “Gold is a traditional store of value and will remain so always.”
The golden run…
In recent times, though, besides proving its mettle as the ultimate store of value, gold is also making a serious case as an appreciating asset, much like equities or real estate. In a world ravaged by terror attacks and wars, gold prices have been on the rise since September 2001. In 2005, in international markets, the price per ounce increased from $424 to $517 — a gain of 22 per cent. On Friday, it closed at $559. That’s still far short of the all-time high of $850 hit during the Iran-Iraq war in 1980, but experts are talking about that level in this shifting political and economic order.
The US, in several ways, lies at the heart of this complex equation that indicates a steady rise in gold prices over the long term. Continuing tension in the Middle-east, first from the US invasion of Iraq and now its displeasure over Iran’s nuclear programme, is keeping oil prices high, fuelling the threat of inflation.
Historically, gold has been a good hedge against inflation.
In inflationary times, currencies depreciate, but gold, a commodity, tends to hold it own, even rise. Countries have historically held gold or the dollar to preserve, maybe even enhance, the value of their reserves. In the past few decades, when the dollar was a pillar of strength, it was the currency of choice to hedge against inflation.
But with the US spending way beyond its means, the dollar is under pressure.
Because of this perceived weakness in the dollar, and to protect their economies from economic uncertainty in the event of more terror attacks, several countries are selling dollars and buying gold.
Even the US is showing an increasing preference for the yellow metal.
According to the World Gold Council, the percentage of gold in the country’s total reserves increased from 60 per cent in October 2005 to 67.5 per cent in December 2005.
Similarly, in the Europe, gold reserves have increased from 45 per cent to 47.7 per cent during the same period. Even hedge funds, big movers of any market with their leveraging power, have huge buy positions in gold futures, all of which is fuelling demand.
Back home too, gold prices, which have been tracking international trends since 1997 when the RBI freed gold imports, have been giving returns characteristic of equities.
In 2005, the price per 10 gms rose from Rs 6,010 to Rs 7,540 — up 25.5 per cent. The uptrend has continued in 2006 as well, with gold hitting an all-time high of Rs 8,275 on February 3. This surge is the result of continuing alignment with international prices as well as rising demand.
Look at gold
as a hedge for your portfolio.
It should not be the core holding in it 10-15
per cent tops
In 2005, total domestic consumption of gold increased by 16.4 per cent (747 tonnes to 642 tonnes).
Unlike most countries, much of this demand is for jewellery, rather than bars and coins for investment.
Last year, at 589 tonnes (518 tonnes in 2004), jewellery accounted for 79 per cent of total sales. Says Shyam Baxi, analyst, Mecklai Financial and Commercial Services:
“India acounts for 25 per cent of physical gold demand.” Adds Bhargava: “Even for investment purposes, rural India tends to buy jewellery.”
Globally, the run-up in prices is finally begin to affect physical demand for gold.
In the last quarter of 2005 (October to December), jewellery demand, which accounts for about three-quarters of all gold purchases, declined 15 per cent from a year earlier — the largest drop since the first quarter of 2002.
Even in India, there has been a drop in demand in the past couple of months, as high prices discouraged some buyers. However, says the World Gold Council about consumer demand trends in India: “While jewellery demand may have been constrained in the first few weeks of 2006, a period of price stability is likely to see a strong level of buying in gold once again.”
Analysts feel another surge is likely and the long-term trend is up. Till such time as the threat of terrorism and higher inflation is real, and the dollar continues to be perceived as weak, central banks and hedge funds will stay overweight on gold. Says Mumbai-based gold analyst Bhargava Vaidya:
“Technical trends suggest gold will hit Rs 8,900 in the next few months, before pulling back to the Rs 7,000-8,000 range a year on.”
Demand-supply dynamics also point to a rise. According to eMecklai, over the past 20 years, global demand for gold has been increasing faster than what the mines have been able to supply. This is unlikely to change, as gold mining operations are at the mature end of their lifecycle. Mining companies have, in fact, reduced their exploration and development expenditure over the past few years.
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