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Gold Corner
Gold Overview
After making an interim low of 1157$/Oz during July 2010 end gold prices are again hovering around 1200$/Oz. Strong physical/jewellery demand spurt up in key consuming nations due to lower prices. Physical demand has remained subdued since last few years as price sensitive buyer were refraining purchases due to continually rising prices. Another important factor fueling the momentum is the weakness in US dollar and it increase gold's alternative asset appeal.
Any prices dip below 1200$/Oz is seen as an opportunity to accumulate gold in traditional markets like India. Gold prices in India reached sub Rs 18000/10 grams levels during late July as rupee remain at appreciated levels despite lower gold prices. Drop in gold prices were generally accompanied by depreciating rupee and hence gold prices in Rupee terms remained at alleviated levels since last two months. Another important factor responsible for spike in jewellery/investment demand is stability in gold prices. Reduction in prices volatility plays an important psychological role and investors are more comfortable buying gold and that was other reason that triggered heavy demand recently.
There are signs that the US economic recovery along with other major economies has slowed down. The economic data releases have not been very affirmative especially in US and Japan. Hence regulators will continue quantitative easing to avoid slightest dent on global growth outlook to political repercussion. US dollar index is on a down trend since last few months as loose monetary policy is likely to hurt US dollar outlook. The fear of double dip recession is rising as investors are anticipating further weakness in global economy. Gold as an alternative asset tends to thrive during such times.
Investment activity remains robust as net inflows into various gold back investment vehicles continues to be on a rise. During the second quarter, 2010 investors bought 273.8 net tones of Gold via Exchange traded Funds (ETFs) monitored by World Gold Council, second highest quarterly inflows, and the total holding in these funds reached a record high of 2071.8 tons worth ~US $ 81.6bn at the quarter end. Investors are always on a look out for cost effective and convenient ways to harness gold’s investment benefits and hefty inflows via ETFs does support the arguments that ETFs are best way of investing in Gold.
Though inflation numbers are not yet rising, loose fiscal and monetary policies advocated by authorities have potential to boomerang as higher inflation numbers. Higher commodity and food prices are a major cause of concern as they can lead to cost push inflation. Most of the commodities have recovered very strongly from the lows made during the crisis. Agricultural commodities have been making headlines off lately due to fear of shortages. Wheat prices sky rocketed as lack of rain in Russia, Kazakhstan and the European Union and flooding in Canada ruined crops. Higher food and commodity prices will likely lead to higher inflation and higher inflation number benefits gold as gold is seen as a good hedge against inflation.
Outlook
Gold prices are taking a breather after hitting an all time high in major currencies. Strong physical demand keeps gold prices well supported at lower levels. The federal open market committee is due to report its decision on interest rate and issue a policy statement and that could influence gold prices movement.
US 10 year treasury yields are at lower levels indicating huge fund inflows and/or lower interest rates. Investors are most likely moving away from risky assets and into US treasury as evident from huge inflows. Gold tends to benefit during such times. Again, lower interest rate leads to higher inflation expectations going forward and that benefits gold.
Physical demand is expected to remain strong ahead of wedding and festival season in India. Strong investment demand in Bars, coins and ETFs at higher levels and Jewellery demand at lower levels is likely see gold prices moving higher over foreseeable future. Interim corrections cannot be ruled out and that can be seen as an opportunity to accumulate gold.
Source:
Bloomberg, www.gold.org
Gold Investment Digest – July 2010.
By : Mr. Hiren Chandaria - Fund Manager, Reliance Gold ETF
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