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Where Goes Gold ?

Monday, September 10, 2012

Over the past two years, this newspaper has been strongly bullish on gold. More so since last August, despite contrary opinion and many voices shouting that the ‘Gold bubble will burst’. Well, it hasn’t. After an appreciation of over 17 % in the period, it still looks strong, says Mayura Shanbaug, who after speaking to experts brings back the view that ‘gold continues to remain favorable as an effective portfolio diversifier.’ 

Yes, the precious metal is even more precious now and there is a strong possibility that it may continue on the same path, as India, the world's biggest buyer of the yellow metal, is approaching the  festivals season which will continue until November coinciding with the marriage season.

The fact remains that India is the world's largest consumer of gold and is estimated to have imported close to a thousand tonnes in 2011. Although imports have dropped following the increase in customs duty in the 2012 budget, the value of imports continues to remain high thanks to the rise in prices and the weakening rupee. Despite the import drop, domestic gold prices continue to rule high with the yellow metal being seen as a strong hedge against inflation. In India, the rise is more rapid on account of the steep depreciation of the rupee against the dollar. Although the outlook on the rupee has improved, traders are still expecting gold prices to remain at elevated levels.

Globally, too gold is seeing a price elevation and is now at double the price it was in 2008, when the global financial crisis hit the economy. “The Euro is getting stronger as ECB has a policy meeting that in which it is expected that Eurozone will issue more bonds to strengthen economies. That indicates Euro is getting stronger, so when Euro gets stronger, gold also gets stronger,” said CP Krishnan, Whole Time Director, Geojit Comtrade.

 “US jobs growth slowed more than expected in August, setting the stage for the Federal Reserve to pump additional money into the sluggish economy next week, so if there is poor data coming out, gold may strengthen as the dollar weakens further,” he said. Krishnan is bullish on gold till November. He feels that gold may hover around $1600 to $1800 per ounce in near term.

However, he feels that on the long term it may fluctuate between $1,500 on lower side to $1900 per ounce on higher side. Krishnan also feels that delayed good monsoon may result in pick up of rural demand for gold around Diwali. “Even if gold falls globally that may not reflect in Indian prices because of depreciation of the rupee,” he added.

Another reason for gold to remain at higher level in the country is that the Indian government may decide to cut down on gold imports on RBI’s suggestion, which wants the government to curb spending on gold imports to control the deficit. “Gold may become costlier in India, as it is the gold is in short supply as the imports have shrunk following increased duty on gold,” he added further.  

Contrary to the popular the popular view Hasmukh Bafna, president, Gold Chains & Jewellery Wholesalers Welfare Association, feels that gold price may see an immediate correction up to Rs. 30,700 – Rs. 29,800 per 10 grams by September 20. “There is no real demand in the domestic market and the sales are not expected to be up even in the festive season as the retail buyer is not buying from the market,” he said.  “Out of the 250 tonnes of imported gold only 10% that is around 25 tonnes is used for the ornaments, rest all goes to bullions for the rich investors,” he added.

“The prices are rising purely on the basis of speculations,” he said.  However he feels that gold prices may not break the barrier of Rs. 32,000 per 10 grams in near term.

“If the slide in rupee against dollar is arrested and if the rupee appreciates till the level of Rs. 46 per dollar then gold may crash to the level of Rs. 22,000 per 10 grams,” he added.

Yet, the consensus view is positive. “Week on week depreciation in rupee has caused gold prices upside,” said Nalini Rao, Senior Research Analyst, International Commodities & Currencies, Angel Commodities. “On technical charts prices may see some upside in near term and on fundamental grounds upcoming Fed meeting can be the trigger,” she said. ”If the current US unemployment figures 8.3% comes down, it would be good for gold prices,” she added. Advising investors to have a four to five months strategy, she suggests that investor should buy at Rs. 30,600 per 10 gms levels, they should stop loss at Rs. 29,700 per 10 gms. “On upside will be at Rs. 31,800 to Rs. 32,000 per 10 grams on technical charts,” she added.

Echoing similar sentiments, Dharmesh Bhatia, Associate Vice President – Research, Kotak Commodities Services said that gold has remained as an asset class with high returns around 26% so far. “With ECB bringing in more money supply in the market, the money will certainly flow into safe asset like gold and so the prices are likely to remain high,” he said.

He predicts that the northward movement of prices will continue till the festive season with an increase of Rs. 1000 per 10 grams from the current levels.

“Gold prices may touch the level of Rs. 32,500 per 10 gram by December-January. If inflation remains at the level it is then by the next December the metal may peak at the level of Rs. 34,000 - Rs. 35,000 per 10 grams,” said Bhatia.

Gold Imports Adding To Current Account Deficit, But…
The Reserve Bank of India (RBI) is urging the public against choosing gold as an asset for savings or investment, India’s love affairs with gold is going to remain as captivating as before. "Because interest rates are very low, people are investing in gold. But the poor should never invest in gold, for gold has never made anyone rich “says K C Chakrabarty, deputy governor, RBI.

One should buy gold when there is a genuine demand,” he said. The deputy governor added that one of the main reasons behind the current account deficit, the annual import of gold worth $60 billion.

"Tell me, how many poor people have managed to save money by buying gold? he asked. However pertinent the question is, the answer is gold will remain favoured and the Indian psyche does not indicate it will change for generations to come…

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