Gold Corner July  2009 Gold Overview Gold price made a healthy recovery from low of around 906$/Oz during early July and is touching higher highs since then mainly on back of weakening US dollar. Gold is perceived to be negatively correlated to US dollar; gold is denominated in US dollar and depreciating dollar makes gold cheaper for Non-US investors and hence increases demand for gold. In coming months, inflation expectations are likely to increase further as a repercussion of expansionary monetary and fiscal policies and that should benefit gold in long run, as gold is presumed to be a good hedge against inflation. Economic Indicators improved gradually during July with continued improvements in the US housing and industrial sectors followed by encouraging figures from auto sectors in early August. The global recovery seems to be well synchronized as the pace of contraction is slowing down along with a decline in pace of job losses. Consumer spending pattern seems to be moving back towards pre-crisis level. Earning estimates and growth outlook are revised upwards throughout economies. Major financial markets have been on an upswing and that indicates that market participants have already priced in a healthy recovery. Majority of equity and commodity markets are radiating bullish sentiments. Metal and energy markets are trading well above the lows made during crisis period and any correction towards pre-crisis lows seems a remote possibility. Again the net speculative length in commodities is low suggesting that markets responsiveness towards positive news would be higher than towards negative news. Such bullish sentiments coupled with infusion of liquidity by regulators will most likely lead to assets price inflation. Physical demand for gold remained low in key consuming areas as higher prices deter jewellery buyers. Besides, concern over scanty rainfall also hampered physical demand from rural India. The volumes for the month on COMEX, world’s largest commodity exchange, showed slight improvement sequentially but were much lower on year on year basis. Though Gold ETF investors disposed of nearly 42 tones during July, the holdings still stands at around 1653 tones and records a net inflow of around 466 tones during the first seven moth of the calendar year. Central banks hold second largest amount of above ground gold and have been major market mover for gold since decades. European Central banks sales are becoming less significant as many have exhausted their sales limit and others have little left to sell. Talks about major central banks diversifying their foreign exchange reserves into gold are gaining momentum. China has announced that it has added 454 tones, an increase of around 75 per cent, since 2003 and now holds around 1054 tones of gold reserves. Russia is also gradually increasing its gold reserves. Outlook As gold is not a consumable commodity the above ground stocks of gold remain more or less stable and demand-supply dynamics does not influence gold price outlook directly. However, investment demand along with macro economic variable seems to be major determinant of gold price outlook. Gold acts as an excellent portfolio diversifier as the factors influencing gold price outlook are different from the ones influencing other financial markets. Slowly and gradually gold has made a permanent position in many portfolios. With increasing uncertainties over the financial markets gold’s importance as a portfolio diversifier is increasing and that should be the major driver for gold prices. Central banks of Brazil, India, China and Russia hold huge foreign exchange reserves and the reserves are most likely to increase further. But uncertainties over currencies outlook, especially US dollar makes reserves vulnerable and hence central banks need to diversify into gold. As per many experts, Central banks should hold atleast 5 to 10 percent of its reserve in gold. And if they aim to hold around 5 per cent of its overall reserves in gold then at least few years of mine supply would be required and that should be extremely bullish for gold prices. Depreciating dollar, higher inflation expectation and risk aversion among market participants should increase the demand for gold and drive up gold prices. Besides geo political uncertainties should also benefit gold- the safe haven asset. Long term investors should keep increasing their exposure in gold as longer term outlook for gold looks very positive. By : Mr. Hiren Chandaria - Fund Manager, Reliance Gold ETF * Disclaimer The information contained herein is the independent and personal view of the author and should not be construed as an investment advise or a standard investment procedure and are not the views of the Company. Neither the AMC, the Trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the authenticity of such information.