New Delhi, March 01: HOW safe is safe? For years, gold has been touted as the safest hedge against uncertainty, be it inflation or bear markets.
This explains why gold delivered attractive returns in 2008 when the global equity markets were in turmoil. During this year, the Sensex fell 52 per cent, but gold prices rose 30 per cent; it was the only asset class that held its ground.
But is it finally beginning to lose its sheen? After soaring to a high of Rs 18,267 per 10 grams in December 2009, gold is currently trading in the range of Rs 16,500, with heightened volatility to boot.
According to Amar Singh, head of commodities research, Angel Broking, a fair amount of risk aversion is coming into play among global investors, which has led to a correction in markets across the world. The most important factor influencing the price of gold is the strengthening of the US dollar. Gold prices have always had an inverse correlation with the US dollar, which is
currently at a six- month high against the euro. “ Also, we haven’t witnessed widespread gold buying by major central banks and institutional investors,” says Singh.
In fact, with retail prices hitting new highs, India, the world’s largest consumer of the precious metal, saw gold demand fall by 52 per cent in January- September 2009 and the average annual demand stagnate at 700 tonnes.
Besides, US President Barack Obama’s statement on curbing trading limits of banks could have a ripple effect on the prices of stocks and commodities, since a large number of banks that have invested either through hedge funds or directly would have to square off or vacate their positions.
Worse, it may not be easy to predict the movement of gold from now on. Says Dhirendra Kumar, CEO, Value Research, “ A large amount of paper investment is being made in gold, which leads to a great deal of volatility. In future, gold can behave like equities, so looking at it as a speculative investment
with a stop- loss lever may be more prudent at this point.” According to Singh, gold prices could correct by Rs 1,000 in the near term.
Hence, the ideal level at which to buy gold would be Rs 15,300- 15,500. One can expect a return of 15 per cent from gold over the next six to nine months.
Although these are valid concerns, what augurs well for the precious metal is the fact that it is considered to be the best hedge against inflation. With the global economies returning to a rising interest rate scenario — the RBI too has increased its cash reserve ratio — we are likely to see higher inflation in the next three to six months. This may lead to people flocking to gold once again. In the near term, experts suggest that investors should watch out for the key support level for gold at $ 1,070 ( Rs 49,246) an ounce ( 28.35 gm). If breached, this could further drag down the price of the metal.
At the same time, investors should keep tabs on the movement of the euro since it is directly correlated to gold. Overall, it is the state of the US economy that will dictate future gold moves — a stronger economy will boost the dollar and, hence, lead to a fall in gold prices.
–Agencies