All that glitters is gold…
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Last Updated: Tuesday, December 08, 2009, 17:46
  
All that glitters is gold…Akrita Reyar

I bemoan the fate of the fathers of the bride and the groom. Getting kids married at this time of the year, when the prices of the mainstay of all glittering weddings, gold, is skyrocketing would not be easy business.

After hitting Rs 16,000 per 10 gms in September, it has whizzed past Rs 18,500. The yellow metal has always been in demand, but never was it such a prized possession as now. There are a number of factors that have gone into making this lucrative investment even more appealing.
1. For one, uncertainty in international currencies, especially the dollar makes gold a reliable instrument to invest in. Add to this the continued printing of currency and low interest rates and you have the reinforcement of gold as a valuable option.


2. The recent crisis in Dubai, uncertainty in the Middle East and increasing oil prices are all combined factors.


3. India has also had a hand in upping gold prices. The RBI recently purchased 200 tonnes of the metal at USD 1050/ounce putting pressure on the market and upsetting the US. It was no accident that Prime Minister Manmohan Singh soothed frayed nerves during his state visit to Washington, saying that India had confidence in the greenbucks and that it would look at making investment in it in the future.
In the bargain, while speeches were being made in the US, India made a cool over a billion dollars in profit because of its gold investment. The buzz now is that RBI may be eyeing to pick another haul of 200 tonnes from the IMF.

4. Earlier, gold producers were hedging, meaning that they had sold gold forward to secure themselves against any price falls. These miners are now buying back. Moreover, higher cost of mining has meant lower production vis-à-vis demand, bringing simple market play into action.

5. While there has been no slackening of demand by Indian retail consumers, China, which is the fastest growing economy of the world, has gained new lust for the metal. Unlike India, gold was not necessarily a traditional form of investment there, but has climbed the desire chart in recent years. With an ever growing middle class, China has for the first time overtaken India as the largest consumer of the commodity.

6. Gold is perceived as the best bet against inflation. Because of the declining value of currency it makes no sense in putting savings in paper money.

7. Gold is highly liquid and can be converted into cash anywhere in the world making it all the more worthwhile.

8. Newer methods of investing in gold, other than jewellery, have given demand fresh impetus sending prices escalating. Gold can these days be purchased in the form of coins, bars, or even bonds. There is a double bonus on this in the sense that a) gold is now accepted as security against loans and b) because of no direct interest earnings on it, there is no income tax on gains on its value.

9. Pure speculation is also playing a part. There is much talk of USD 2,000 per ounce. With expectations of bullion prices touching the roof, people are investing in it for future gains.
After a fairly heady rally, gold prices finally went into reverse gear on December 4. Many feel that it was simply a correction, long over-due. Others think that the new unemployment statistics released by the US, showing job cuts at 11,000, the lowest since 2007, have infused new assurance in the US economy and its currency, setting of talk about the end of recession. Japan too has been making noises about its confidence in the American dollar, sending out an optimistic note.

Whatever it may be, gold prices did finally come down 5% last week. But, the trend from here on may be difficult to predict.

Gold as a solid investment option is hard to beat given 35% returns, while there has been an erosion of returns on other alternatives. But the US is working hard to revive its economy and has a stake in keeping the dollar as the prime currency.

Depending on which side the wind blows in the international market and how the western economies perform, there are two ways from the Rs 18,500 mark. One could be the easing of prices and finally settling down at around Rs 16,000, and the other is that the metal gathers even more credence sending prices up and away… simply out of reach.


First Published: Tuesday, December 08, 2009, 17:46


(The views expressed by the author are personal)
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