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Will gold touch Rs 40,000?

Rajiv Bhuva | Print Edition: September 18, 2011

On August 22, the spot price of gold touched an all-time high at $1,911 per ounce (28.35 gm) in international markets, having increased by nearly $400 since the beginning of July. And if global banks and analysts are to be believed, by the end of this year prices could be in the range of $2,000 to $2,400, and possibly even touch $4,000 over the next few years.

Closer home, Infosys Chief Financial Officer and Director V. Balakrishnan expects gold to touch Rs 40,000 per 10 gm in the near future.

With uncertainty in equity markets globally and poor visibility on when the US economy and its developed counterparts in Europe will turn around, capital will flow towards relatively risk-free avenues like government bonds and gold, he says.

Surging gold brings cheers, but fears too

These projections stem from the widespread pessimism about the global economic outlook.

"Financial markets will be vulnerable to recurring bouts of risk aversion for the next few years as governments in the US and Europe struggle to bring down debt to more sustainable levels," says Deutsche Bank in a recent commodity research report. There will be more long-term concerns if the US is unable to regain its AAA sovereign credit rating.

"At the margin, this would reduce the appeal of US treasuries as a diversification asset while enhancing gold," the Deutsche Bank report adds.

Bank of America Merrill Lynch, or BofA, reckons the downgrade of the US will further fuel conditions - low growth, low interest rates, and high liquidity - which will pave the way for a gold price rally. "It will probably increase the pressure on central banks in emerging markets to diversify their international reserves out of the US dollar and into gold," BofA says in a research note. Both Deutsche Bank and BofA see prices at $2,000 over the next few months. Already, central banks in South Korea, Mexico, Russia and Thailand have been busy buying gold.

The bull run in bullion is also fuelling nervousness. "We continue to caution that gold is richly priced and that on a 12-month horizon the risks to the downside exceed those to the upside," says Nick Moore, Royal Bank of Scotland's Londonbased Head of Commodity Strategy, in a recent report.

According to the World Gold Council's Gold Demand Trend data for the quarter ended June, investment in gold bars and coins and in jewellery grew nine per cent and 12 per cent, respectively, year on year. "Traditionally, rapid price rises such as those seen in August would have a negative effect on demand in price-sensitive markets like India," adds Moore.

So, will gold touch Rs 40,000 in India? The country, the world's largest gold consumer, has yet to buy in bulk, as its two-month-long festival season begins only in late September. Besides, there are no indications yet that the global outlook might not worsen further.

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