GOLD – THE SHINE GETS BRIGHTER

The markets are down, which is not so good. Oil prices are down which is good. The rupee vis-s-vis the US dollar is better which is also good. Inflation is down, which is excellent. Economic growth is down, which cannot be helped. But gold is scaling new highs everyday, now that is a real shocker!

Gold futures hit a new high of Rs 15,050 per 10 gram in early deals today, taking cues from the firm trend in other Asian markets, where it shot up by 1.55% to $956.20 an ounce, which is the highest in seven months. On the Multi Commodity Exchange, gold for August-month contract shot up by 2.31 per cent to Rs 15,050 per 10 gram. The contract clocked business turnover of five lots.

The interim Budget might have been a damp squib and pulled down the other indices but for gold, there seems to be no stopping. So why is everyone around the world buying gold? Indians buying gold is routine but all over the world people buying like there is no tomorrow is new. World recession and uncertainty are the two main reasons. After the collapse of some of the biggest banks in the world, people just do not trust even the banks. The feeling is that they need to park funds in something which would not just vanish into thin air. Holding cash is risky as currency value also depreciates. Realty was usually the other avenue where people parked their funds but today, even that is not an option. And there is also no certainty about when the recession gripping the world would come to an end. More and more people, are thus shifting to gold.

With so much money also being printed in USA, there is fear that with the supply of money increasing, the dollar would only depreciate further. Currencies around the world are pegged against the dollar and hence this fear psychosis is pushing people to buy more gold. With the rupee depreciating against the dollar, there is large scale buying of gold because the rupee value of gold is said to be higher against the dollar. There is also fear that US government’s rescue plan may not revive the economy.

Apart from investors flocking to buy gold, the marriage season is on in the largest market of gold in the world, India. Major buying is said to be now coming from jewellery fabricators to meet the marriage season demand pushed up the gold prices. Also given the uncertainty in all the markets, people do not know where things will be in 2-3 years from now. So many parents are also said to be stocking up on gold as the best saving for their children’s future.

Protecting the value of their money is the single most priority and that is something which only gold seems to offer. This can be gauged from the fact that the world’s top five gold exchange traded funds (ETFs) have increased their gold reserves by 108 tonne in the past three months. The total holding of these five five ETFs has gone up to 1,080 tonne from 972 tonne.

Apart from coins, biscuits and jewellery, the investors are exploring the option of ETFs. A gold ETF is a financial instrument like a mutual fund whose value depends on the price of gold. In most cases, the price of one unit of a gold ETF reflects the price of approximately 1 gram of gold. As the price of gold rises, that of the ETF is also expected to rise equally. Most gold ETFs are traded on the National Stock Exchange, so one requires a broker who is its member. There are five gold ETFs in the market at present — Gold BeEs, Kotak Gold, Quantum Gold, Reliance Gold and UTI Gold ETF.

Feb 2008 saw a rush of people to open demat accounts and in Feb 2009, people are exploring the option with their broker to buy ETFs, for their share of gold, demat accounts seem to have been put in deep freeze.

Compiled from SP Tulsian.com