Smart Investing: Gold to prove its mettle soon

Sangita Shah, Business Standard, 21 August 2003 :

Those who have kept the faith in the yellow metal can expect decent returns in the near future. The price of gold, which was more or less stable in the past decade, is now moving northwards.

Unlike stocks, gold prices shoot up with every negative event across the globe. Based on the centuries old fact that gold demand shoots up in war-like scenarios, the new threat of global terrorism is expected to spawn a similar effect on the precious metal.

Gold prices are expected to zoom up to as high as $420-450 per ounce in the next couple of years from the current $360. Besides, gold demand is at a near record level of 4,000 tonne a year, while mine production has been steady at 2,250 tonne a year, according to World Gold Council (WGC).

Several studies by the World Bank and Beacon Group advisors point towards a declining production of more than 30 per cent over the next seven years. This means that gold output will drop to 2,000 tonne a year by 2010

Notwithstanding all these price drivers, China’s entry is expected to match India’s thirst for gold. Chinese citizens now have permission to invest in gold and estimates are that this oriental market will fuel gold demand by another 300 tonne a year.

According to Deccan Gold Mines, customers lined up to buy investment grade bullion when it went on sale in China on 27 December 2002 for the first time since 1949.

Retailers ran out of stocks within a few hours of the bars going on sale. India itself is the largest importer of gold with no domestic production.

The wedding customs and the habitual savings by farmers in gold in the agrarian country is expected to bolster demand. Add to the fact that the rupee is strengthening.

Recently, a strong inverse relationship between dollar and gold has strengthened like never before. The US dollar is expected to languish owing to extreme debt levels and deficit spending, foreigners withdrawing investments, a weak economy and negative real interest rates.

Further, gold is slowly crawling back into the monetary system. The strong desire for a dollar independent currency has seen Malaysian introduce a new currency made of gold.

The gold dinar is 100 per cent backed by gold. If the move is successful and aped by other countries, then the future will be nothing less that bright for gold.

Moreover, an interesting aspect has raised by the US-based Gold Anti Trust Action Committee (GATA), which believes that gold prices have been artificially stifled over the last many years.

Given these facts, it will be prudent to say that gold prices can only go up and no other way. Indians have been the beneficiaries of the gold price suppression (if proved) as the country has been a consistent buyer for decades.

Investors willing to wait for a year can expect hefty returns from gold amid declining interest rates. Moreover, India is all set to begin futures trading in gold by October and this will provide a hedging alternative.

A WORD OF CAUTION

Investors need to invest in pure gold bars, as jewellery may not ring in equivalent gains. Jewellery entails hefty making charges which cannot be recovered on sale. It also loses the intrinsic value of bullion as various metals are added for jewellery formation.