Gold – Glittering More Than Ever
Market Moving factors
Euro Prices fueling Gold rise as a key Currency
Gold as a perfect currency hedge
Exchange Traded Funds
Gold Pendant gets costly in India
Gold has been seen as an Investment, A currency, A commodity and as A Beautiful
Object. It was financial boom and modernization of 80’s and 90’s that made gold go back
in the scene as most investors looked for “Equity” and “bonds” as an investment. But last
decade has seen an enormous growth in gold be it as an “Investment” or “Commodity” or
moreover used as a perfect hedge for currency. One factor that makes it a firmer
investment avenue is that its demand always exceeds its supply. There are many reasons
why people and institutions are once again investing in gold.
General Characteristics of Gold
The Gold delivered under the contract must be gold bars, weighing 100 grams each, and
assaying not less than 999 fineness, bearing a serial number and identifying origin of the
refiner/brander. Up to a 999.9 fineness, bearing a serial number and identifying stamp of
a refiner, is approved by the Exchange.
A good thermal and electrical conductor, gold is generally alloyed to increase its strength,
and is used as an international monetary standard especially by IMF and Central banks of
countries, widely used in jewelry in eastern countries, for decoration, and as a lasted
coating on a wide variety of electrical and mechanical components.
Market Moving Factors
Indian gold prices broadly follow international price trends.
Ground supply of gold directly co-relates with prices of gold. Gold supply is
also determined by central bank sales, reclaimed scrap and official gold loans.
Demand for gold is closely tied to the production of jewelry and demand for
gold during the festive seasons.
World macro-economic factors such as US Dollar, interest rate and crude oil
prices influence the prices of gold.
Return on investment in gold compare to return on stock markets drive the
sentiment of market.
The yellow metal’s traditional role is one of a “safe haven,” a place where participants
turn during times of acute stress in markets. Gold’s popularity has grown, as most
investors feel any sustained recovery from the recent worldwide economic downturn will
be a long-drawn process.
The uptrend in gold still looks strong. The two key drivers of investment interest in gold
are general concerns about the stability of the global financial system (stimulating safe
haven buying) and the risk of currency debasement/inflation (gold as currency hedge).
While the first of these concerns may have been eased by the massive EU/IMF rescue
plan, the second has arguably been heightened by it.
In many European countries, off-balance sheet debt is also high, though the quantity is
not known. So, the crisis may be deeper than it looks.
Withstanding many international issues for the past few months like, Volatile Financial
Markets due to Greece Debt Worries, growing concerns about the euro in the wake of
credit downgrades of Greece, Portugal and Spain is one reason. EU and IMF trying to
strengthen the Euro with Bail-out packages, this glittering metal stood much firmer and
positive than any other commodity or investment avenue. We’ve been following it since a
few quarters and now it is shining much brighter than ever.
Gold often rallies at times when investors are nervous about the financial markets. Gold
rose dramatically when Bear Stearns and Lehman Brothers imploded in 2008, for
example. Presently, it has been trading in upper range ever since it touched a high of
$1227 in December 09. The recent rally in gold has broken this high and brought it into
the upper trading range. Now the question is that these particular candles will help gold
shine further or it is one of those seasonal corrections. But one thing is sure that if Greek
in near future defaults and international worries make market sweat more, then gold will
Below chart explains and decipher the net change in gold prices in recent past. In the
past 19 months gold has given a return of 83.35% till date.
161% Retracement level
Source - CapitalHEIGHT
In the international market the gold price edged up modestly in Q1 2010, ending in
March at US$ 1,115.50/oz, on the London PM fix, compared with US$1,087.50/oz in
December 2009. The average gold price also rose slightly, to US$1,109.12/oz, from
US$1,099.63/oz the previous quarter. Throughout the 2010 first quarter, gold mostly
traded in a range between US$1,058.00/oz and US$1,153.00/oz, as some factors
supported the price but others kept it from rising further.
Euro Crisis Fueling Gold`s Rise as Key Currency
If Greece is in trouble, Investors won’t buy Euros anymore. Investors have been going
out of Euros and into gold. Gold was used as a reserve currency but was replaced by the
U.S. dollar after the Second World War with the establishment of the “Bretton Woods”
system. The dollar’s status, however, is fading fast. The European central bank said the
share of dollars among reserve currencies worldwide dropped from 70.9 percent in 1999
to 64.1 percent in 2008. Amid the global financial crisis, the share dropped to 61.5
percent last year. The share of the euro, on the other hand, has continuously increased
from 17.9 percent in 1999 after its launch to 28.1 percent last year. The euro has become
the world’s No. 2 reserve currency a decade after its inception. Confidence in the euro is
also dropping, however, in light of Greece’s fiscal crisis and the ripple effect throughout
the euro zone to Portugal, Spain and Italy since the end of last year. Skeptics warn that if
the crisis spreads throughout the rest of Europe, as the crisis is contagion in nature, the
euro system will collapse.
In the wake of the Greek crisis, important conditions for the euro to become a key
currency have been undermined. The euro, which had been the leading candidate to
replace the dollar as the global standard, is not expected to leapfrog the greenback.
Instead, China is predicted to take this opportunity to globalize its currency.
Gold as a Perfect Currency Hedge
In an RBS survey of foreign reserves managers at 43 central banks worldwide, more than
50 % said the “Yuan” will comprise five percent of global foreign reserves in 2026 at the
earliest. The greenback’s power is growing weaker, its nearest competitor euro is in
trouble, and the Yuan is not ready to take over. So gold -- the ultimate safe asset -- is
expected to grow stronger in influence.
In particular, major foreign currency holders such as China and India are finding
alternatives to the dollar but experts say there is no good alternative other than gold.
Gold prices saw a sudden spurt internationally in recent days as the crisis in some
European nations deepened. Investors became risk-averse and reduced their investments
in most asset classes, hedging portfolios by buying gold.
Prices went up nearly $130 in just a month and are currently at all-time highs. During the
weekend, when a trillion-dollar bailout package was announced by European nations,
gold shed some gains as most other asset classes, including equities, went up sharply.
However, when markets found the rise in equities was due to unprecedented short
covering, the risk appetite faded.
Exchange traded funds Update
Investors bought 5.6 net tonnes of gold via exchange traded funds (ETFs) in Q1 2010,
bringing the total amount of gold in the ETFs to a new record of 1,768 tonnes, worth
US$63.4 billion at the quarter-end gold price. ZKB Gold ETF and Julius Baer Physical
Gold ETF, both listed on the Swiss Exchange (SWX), recorded the strongest inflows
during the first quarter, adding 10.2 and 8.1 tonnes respectively, as interest in the Swiss
based securities continued. These funds remain small, however, compared to SPDR®
Gold Shares, or GLD as it is known, listed on the NYSE Arca and cross-listed in Mexico,
Singapore, Tokyo and Hong Kong with 1,130 tonnes (worth US$40.5 billion) in assets.
GBS Bullion Securities (listed on the London Stock Exchange) shed 7.8 tonnes in Q1, the
largest net outflow of the ETFs.
Gold Pendant Gets Costly in India?
Indian market, despite the traditional price-sensitivity of demand, there is an important
bullish factor contributing to a tight global/supply demand balance and rising world gold
prices this year. Importantly for the world gold market, India dances to its own tune, with
demand often reflecting domestic economic circumstances.
India is one of the country we mentioned using gold as alternative to the Greenback. Gold
prices have seen an upward trend since 2007. Price of gold in March 2007 was only
Rs.10,800. Since then it has seen an annual increase of 28-35 percent.
Presently, Gold is trading in upper range near its all time high of Nov 09 at Rs. 18364 and
has topped at Rs. 18350 per 10 grams recently. Not to mention, It has topped around one
of the gold buying festivals of Akshay Tritiya. After that, a $ 500 billion Indian Marriage
Industry starts of and that can be one of the factor to fuel demand for Gold till Diwali
Though most Jewelry shop owners feel that demand is still not in its full swing and there
has not been much positive buying in the market. As the price of gold rises it gets hard
for “Indian middle class families” to buy gold or they might buy less quantity in same
CapitalHEIGHT view - Glittering future
In the overall context, across the globe it is believed that future for gold looks good. We
presume it is gold in precious metals that has the potential to go up to $1,300 in the near-
term but post that, correction is due.
In the long run, Gold will continue to give 15-20% return for at least next four to five
years. Our reason is that gold has found its place in most investors’ portfolio. Also, the
volatility in market in the near term due to PIIGS will keep gold as an attractive asset
class. The worries of inflation in economies and changing currency dynamics due to
bailout package will help gold rally up in the near future.
Technically too, the trend is very bullish and we expect steady gains initially only to the
$1,250/55 area. Beyond that, the next set of meaningful targets is around $1,350/74
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