What goes up, must come down. Newton's law of gravity is religiously followed by all assets. Well, almost all.
In a multiyear defiance of this law, gold prices have continued to move in only one direction-up. In the past three years, the yellow metal has given a return of almost 28 per cent. Even though gold prices are at an all-time high, there is still a lot of steam left in it.
Gold thrives on uncertainty, like the one that prevailed after the global meltdown in 2008-9. At such times, the demand for the yellow metal pushes up its price. Gold also loves inflation, high crude prices and a falling dollar.
All these factors, which have pushed up gold prices in the past three years, are back with a bang and have put the precious metal in the sweet spot that it was in March 2009. If the European nations can shrug off the sovereign default crisis and the world economy is back on track, inflation will continue to rise, and gold, which is seen as a hedge against inflation, will do well.
Adding to the sheen are prospects of the crude oil prices rising from around $82 per barrel to nearly $100-120 per barrel over the next 5-6 months. Gold and crude prices tend to move in tandem, so you can expect some fireworks.
Gold will also do well if there is a severe deflation and the world economy faces a renewed financial crisis. This is because gold is also seen as a safe haven that assures value when everything else is falling.
"Gold prices have retraced 5-7 per cent from the record high. This is an opportunity to accumulate because the price is likely to touch Rs 25,000 by next Diwali"
Deputy Manager, Research, Anagram Capital
"Gold is in a sweet spot right now as its ability to wear different hats will make it an efficient hedge against deflation or runaway inflation," says Devendra Nevgi, founder and principal partner, Delta Global Partners.
Analysts are anticipating a repeat of 2008-9. "We expect international gold prices to touch $1,500 per ounce in the next 2-3 months and $1,800 by the end of 2011," says Renisha Chainani, deputy manager, research, Anagram Capital.
This is a 30 per cent upside in dollar terms, but Chainani warns that the dollar itself may depreciate against the rupee, so the real gains for Indian investors may get pared to around 25 per cent.
"Prices have retraced 5-7 per cent from the record high. This is an opportunity for bargain hunting because it is likely to touch Rs 25,000 per 10 g by next Diwali," she says.