Business Today

Soaring Sensex & Re rise rein in gold rush

A strong rupee and soaring stock market are restricting gold prices in India from zooming to lifetime highs.

B. S. Srinivasalu Reddy | September 28, 2010 | Updated 15:48 IST

A strong rupee ( rising against the US dollar) and soaring stock market are restricting gold prices in India from zooming to lifetime highs even as the price of the yellow metal crossed the psychological barrier of $1,300 per troy ounce in the London market late on Monday.

{mosimage}Earlier on July 21, 2010, gold had peaked to a record level of $1264.9, but lost ground for a while before regaining investor confidence.

Near month ( September) gold futures were trading at Rs 19,090 per 10 grams on the Multi Commodity Exchange (MCX) at around 6 pm on Monday. But physical buying remained lacklustre at the price as it is considered too costly.

If the rupee were to be trading at the level seen on the first day of this month at Rs 47.08 against the dollar, then the price of gold in the domestic market should have crossed Rs 21,000 per 10 grams, when it crossed $ 1,300 per ounce in the global markets. But the rupee was trading at Rs 44.99 per dollar on Monday evening.

"The surging stock market has attracted some funds from the commodities market, including that of gold. A steep fall of the dollar against several Asian currencies, including the rupee, had been putting pressure on domestic gold prices over the last few weeks," said Anand James, chief analyst of Geojit Comtrade.

In the domestic market, the price of gold has remained in a tight range of Rs 18,900- 19,257 ( peaking on September 15) since the beginning of the month due to a strong rupee.

"Stocks are expected to correct in a month or so, at or around Diwali, bringing gold back again into limelight," James added.

Aurobinda Prasad, head of research of Karvy Commodities feels that the spiral of the rupee would come to an end in a month or so when it breaches Rs 45.50 from above.

He sees the precious metal trading at an average of Rs 19,000 over the next three months till the year- end. " The outlook for gold continues to be good. Auspicious occasions like Diwali and Dhanteras are expected to boost demand.

However, we may see a slight correction, taking the price to Rs 18,500 in October," he said.

India, being the biggest consumer of gold in the world, imported 450 tonnes of this yellow metal in the first half the current fiscal. However, imports have dwindled in the second half of 2010, mostly due to lack of demand at higher levels.

Naveen Mathur, associate director of commodities and currencies at Angel Broking, said, " There is an expectation that gold will fall to Rs 17,500 level before bouncing back. That is also expected to revive imports as revival of physical demand is expected at that level." The present demand is being attributed to exchange traded funds ( ETFs) or from those investors adding it to their portfolio as part of rebalancing their portfolios to the emerging uncertainties in the market.

Dollar had been losing steam as investors started shifting to safer havens like emerging market equities and precious metals like gold and silver in the wake of growing doubts about the revival of the US and global economies. The world's largest economy is expected to slow down further in October, 2010, according to latest reports.

Whenever there is uncertainty in the global economy, gold becomes attractive as an investment opportunity. Gold is considered a hedge against uncertainties, inflation and geopolitical tensions.

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