Gold Market Analysis

Gold Market Analysis

India is the world s biggest gold consumer. The RBI has recently added 200 tonnes to its kitty and the yellow metal touched a record high of Rs 16,785 in the month November 2009. Spelling a golden era for the mellow yellow. Clearly globally gold prices have risen substantially over the past decade with gold witnessing a phenomenal bull run.

Primarily this rally is being driven by a prolonged secular bear market in the USD as gold is negatively correlated to the USD. Investors are borrowing dollars to buy emerging (high yield) market stocks and commodities, as an after-effect of very low interest rates in the US, hence pushing USD down further.

The historical negative relationship of USD against gold amid signs of possible prolonged lower US interest rates has attracted unprecedented speculative/ investment money flow to gold.

Stimulus packages by governments around the world have led to inflation rising in the medium term, which supported gold prices going up, as gold is considered a hedge against inflation. A rise in the US interest rates could affect gold prices in the form of some selling pressure from the speculative/investment community, taking it to levels from which physical demand starts supporting prices The growing interest by Central Banks across the globe to increase their exposure to gold as a part of their foreign exchange reserves is adding to its soaring prices.

Expectations for other Central Banks to buy gold after India s purchase continues to underpin the metal, with Russia and China likely to buy soon. Lack of scrap gold coming to the market despite high prices is certainly a reflection of the entrenched bullish sentiment that has taken hold. The India-ASEAN FTA that entails zero duty on gold products to be imported from ASEAN nations from 2013 onwards is touted to change the market dynamics and price scenario considerably. Between April 2008 and February 2009, India s estimated gold imports were worth $9.1 bn from Switzerland, $2.9 bn from Dubai and $2.1bn from South Africa. As imports make up the maximum chunk of India s gold (India produces a minuscule two tonnes per annum), experts opine it will impact old hubs in the long run.

Gold prices are rising as all factors that affect its price are all in its favour. Prices are likely to remain bullish for the next few months, and a target of a whopping Rs 18,000/10 Gms doesn t seem distant. Investors can book profit on every rapid high price jump or else there is no time limit for selling it, as gold is always gold; the safest asset class with best returns than any other assets class. Investors should buy gold on all dips. Retail investors should hold gold for the long run, the near most targets for gold seems to be Rs 17,500. Investors should wait for dip in prices or cool off as we say, and enter gold for higher targets. Experts believe that gold in medium term looks constructive and in a long term bull trend and any violent corrections in the market would offer retail investors ample opportunities to buy.

Experts say that Investors should buy gold in a staggered manner on corrections and buy gold in parts. For example, if one has to invest Rs100 in gold, then the investor should consider buying 25% right away and wait for some minor corrections in the market and keep adding to the position. Other experts say that Retail investors should follow the basic principle of investing, keep a target in mind and exit when it is achieved. Those who would like to enter now can keep a target of Rs 18,000 in mind for exit. Investors should remember that the factors which drive gold prices are occasionally local, usually global and always dynamic, so it s best to be in touch with your broker s research desk. Spot gold is currently trading around $1,100 mark whereas prices in the domestic market is trading around Rs17, 000/10 Gms, a massive increase from the Rs 6,000/10 Gms levels witnessed in 2006.

The shine of gold is here to stay in coming times. Though, higher prices have hurt jewellery/fabrication demand, as buyers are feeling wary of at buying such high levels. Still Retailers can invest in tranches, from a long term perspective, as gold has generated returns of around 16%- 18% per annum over the past decade. In near future we will witness more players in gold trading and since the scenario is purely driven by supply and demand, gold prices will increase. However, given the soaring prices and dollar dynamics, one wonders if a gold bubble is building up? There is no bubble and there are justified reasons to invest in gold. But once the world economy starts recovering, all this money will start chasing riskier assets like equity and real estate in the quest for higher returns and that will eventually spell the beginning of the end of this rally. Therefore, think seriously before investing and try to start investing in gold.