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Gold: A Time Tested Investment

Monday, October 31, 2011

Dr. Hanish Kumar Sinha
is Head, Trade and Commodity Intelligence Group, National Collateral Management Services Ltd.

The enormity of long and short hurdles encompassing the global world has led to the strengthening of the demand for the safe heaven – gold.

The major issues concerning the global economic stability are the financial crises surrounding the Euro Nations, slowing down of Chinese economy and uncertainty in US economics which has been further fuelled in by the uncertain dollar value putting increased pressure on the global trade balance across countries. Fitch placed 12 major European and US banks on watch for possible downgrade. EU members will continue to take measures to support the economy, we doubt whether the steps will be enough to ease fears. Meanwhile increasing intervention by central banks has also increase gold’s appeal as an alterative asset.

US new home sales, weekly jobless claims, Richmond Fed manufacturing index, Q2 GDP estimate, pending home sales, Chicago PMI and consumer sentiment are supportive the gold prices.

On the other hand, consumer confidence, Dallas Fed manufacturing index, durable goods and personal income failed to meet expectations. US dollars continue to remain weak against other major currencies, trading below 80. With the recent disappointing economic data from the US labour market and continuous worsening debts problems, markets are widely expecting the US Fed to come out with a 3rd Quantitative Easing policy or some other stimulus policy to attempt to boost the recovery process. Thus on the economic front US economy still is in the doldrums and far from stable.

On the Asian side, China also increases measures to support its economy. After reports that China’s sovereign fund is buying stocks of 4 largest banks, reports noted that the Chinese government will provide financial support and preferential tax policies for small companies. The continued uncertainty in the Chinese economy has led the investors to invest more in gold and other precious metals.

Chinese gold demand has significantly increased in the first half of 2011, causing imports to rise further. This factor is likely to have a supportive effect on global gold prices. China is the world’s largest gold producer and produced 351 tonnes of the yellow metal last year. Gold imports had reached 240 tonnes.

Inspired by the huge gold demand, Chinese government is keen to encourage sales of gold in a country which has seen gold demand soaring 27 per cent last year. On the global front the demand for gold has also excelled. Global gold demand in the second quarter of 2011 totalled 919.8 tonne, down 17 per cent from the remarkably strong levels of 1,107 tonne in the second quarter of 2010. Gold demand in value terms grew by 5 per cent year-on-year reaching $44.5bn up from $42.6bn in the second quarter of 2010.

Thus we can see that in spite of the ups and downs in the prices the lure towards gold is likely to persist. In the coming months we expect gold to maintain its shine, both in terms of value and intake, by both global as well as Indian investors.

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