Want to buy gold ?

If you had set your heart on new jewellery and were waiting for gold prices to dip ‘just a little’ before you made that purchase, gold’s recent price moves may have had you grinding your teeth in frustration!

After setting a record at Rs 16,000 per 10 gm in late September, gold prices have continued to nonchalantly race ahead to breach the Rs 17,300-mark recently. So, why are gold prices on fire, even after the festive season demand is well and truly over?

Well, recent gold price moves have nothing to do with Diwali or even Indian buyers, but with factors such as a weak US dollar, central bank buying and the metal’s newly acquired sheen as an investment option.
Hitched to global prices

Gold prices in India do perk up a bit during Diwali or Akshaya Trithiya, when retail buyers throng the jewellery shops. However, do remember that India imports the bulk of its gold requirements.

Hence, only two factors actually hold sway over where Indian gold prices are headed in the long term — global gold price trends and the rupee-dollar exchange rate.

Take 2009. Gold prices in the Mumbai market (for standard gold, ten grams) have shot up from about Rs 13,520 at the start of the year to over Rs 17,300 now — a 28 per cent gain.

Domestic prices have merely followed global gold prices, which rose from $827/ounce to $1,139/ounce (a 38 per cent gain) over the same period. Price gains in India have, in fact, not kept up with global trends, mainly because of the rupee strengthening by about 8 per cent against the dollar for the year. Gold in global markets is usually priced in dollars.

A stronger rupee makes every tonne of gold cheaper to import into the country; translating into more moderate domestic prices for gold.
Safe haven

So the question we should actually be asking is: Why did global gold prices shoot up this year? For one, after being buffeted by the economic crisis last year, many investors were wary of traditional assets such as stocks or bonds and were desperately seeking a safe haven.

Gold, globally accepted and easily convertible into cash, seemed to fit the bill perfectly. Since then, stocks and bonds have staged a rebound. But lingering doubts about whether the “global recovery” was going to last have ensured that gold prices held on to relatively high levels.

Some of gold’s gains this year also have to do with the commodities pack seeing a surge in investor interest this year. Gold, donning its commodity hat, has benefited from this rising investor fancy for hard assets such as industrial metals, which could see demand improve as Asian economies such as India and China recover from last year’s slump.

Much like other metals, the mining supply of gold hasn’t seen much improvement over the past five years, leading to relatively tight global supply of the yellow metal.
Diminishing dollar

However, the most important reason why gold prices are at a lifetime high today (gold has already sailed past its previous all-time high of $1,030/ounce hit in March 2008) has to do with the sliding value of the US dollar against other leading currencies. Why should the dollar’s behaviour impact gold prices in any way?

For one, the dollar’s weakness against other currencies has the potential to give worldwide demand for gold a leg-up. If a weaker dollar makes it cheaper for Indians to buy gold in rupee terms, it does the same for other large gold consumers whether it is the West Asians or the Chinese.

Two, the US dollar is much more than just paper money in the global scheme of things. The US’ status as global economic power has ensured that its currency — the dollar — has remained an investment of choice for most global investors with surplus cash on their hands.

For many years now, surplus liquidity from all over the world has flowed into dollar-denominated assets — the currency itself, US government bonds and American money market funds. However, the steadily sliding value of the US dollar in recent times, coupled with the country’s economic troubles, has stoked fears that the dollar could be in a terminal decline.

Those fears have prompted a whole host of global investors, the central banks of many nations included, to look for alternative “safe havens” to park their funds in.

Gold, once the standard on which all paper money was based, currently appears to be the haven of choice.

While the People’s Bank of China admitted to progressively adding to its gold reserves in April this year, India’s own Reserve Bank of India has recently bought a whopping 200 tonnes of gold from the International Monetary Fund to buttress its gold reserves.

This move proved to be the tipping point which pushed gold prices beyond their earlier lifetime highs. Investors saw central banks emerging as a new class of gold buyers!

With so many factors at play, it is no surprise that gold has emerged as quite a good investment option in recent years. Gold is now at a new lifetime high, which means that any investor in gold over the past few decades would now be sitting on a positive return.

To clinch the argument, gold has managed an impressive 21 per cent annual return over the past five years and has closed every one of the last eight years with price gains — a record that even stocks would struggle to beat. With returns looking so upbeat, can a horde of investors be far behind?
Improving returns

Gold’s steadily rising price has seen a steady rise in the “investment” demand for gold at the global level. Gold Exchange Traded Funds (ETFs are mutual funds that stock up on gold and then issue units for the same value for investors to trade in), have seen demand for their units shoot through the roof in recent years. That has meant higher gold demand from these funds.

According to World Gold Council estimates, ETF demand for gold in the first half of 2009 stood at over 500 tonnes, three times their annual levels five years ago. ETF demand today accounts for roughly a third of the annual gold demand.

What ETFs have essentially done is to allow normal investors to hold gold “electronically” in paperless form, much like stocks or bonds.

Buying gold a few years ago meant acquiring weighty and cumbersome bars of gold, putting them through purity checks and then hiring a safe deposit locker at stiff rentals, all to just own a zero-dividend paying asset.

The emergence of ETFs has taken away all those negatives associated with buying and storing gold.

With the winning combination of convenience, instant liquidity and great returns…. Is it any surprise that gold prices are at never-before levels?

via BL