Gold rush ahead

At over Rs 11,800 per 10 gm, you would think that gold is expensive. But analysts don’t think so.

Print Edition: February 21, 2008

At over Rs 11,800 per 10 gm, you would think that gold is expensive. But analysts don’t think so. They feel that despite the phenomenal rise in the price of the yellow metal—from Rs 9,200 in January 2007 to Rs 11,819 per 10 gm on 1 February this year, a rise of 28%—there is still quite a lot of upside left. The weakening of the dollar and fears of a US slowdown have pushed up the price of gold in the global markets.

Back home, the instability in the stock markets and soaring demand are doing their bit to make the precious metal even more so. “Gold is seeing a run up in prices due to the current uncertainty in the global markets. Funds tend to move money into gold as it is considered a safe haven,” says Hiren Sanghvi, head, BRICS Commodities. Analysts believe that gold prices could move up 10-15% from these levels this year before stabilising.

Gold rush ahead
The Gold Fields Mineral Services, a UK-based precious metals consultancy, predicts that this year the average price of gold would be about Rs 11,402 per 10 gm. It has capped the downside at Rs 10,665 and the upside at Rs 13,180 per 10 gm. Some analysts are more optimistic about the returns that gold can deliver. “Gold prices could rise by 8% by March. The downside is capped at 15% from the current price,” says Sanghvi.

Kotak Commodity too maintains its bullish stance on the metal. “Gold has generated a compounded growth of 14.41% in the past seven years. It would be safe to assume such returns in the coming years although we strongly believe gold will outperform,” said a spokesperson for the brokerage.

Some of these gains would be pared by the high entry and exit loads on investments in physical gold in the form of “making charges”. Even a plain gold coin does not escape a 5-10% deduction on that count. It’s here that gold exchange traded funds (GETFs) come as a better alternative for the investor.

GETF units can be traded on stock exchanges like any stock. While most GETF units are linked to the value of 1 gm of the metal, a new fund by Quantum AMC lowers the entry point by linking it to 0.5 gm. So should you invest in gold? Yes. But not because you are running away from stocks or mutual funds.  As a near cash investment, gold will always have a place in your portfolio. It is time to review this part of your portfolio. And unless there is a specific consumption need, just opt for paper gold.

— Rajshree Kukreti and Tanvi Varma

Sensex movement

Year 200443.6%
Year 200532.9%
Year 200654.7%
Year 200735.8%
Jan 2008-13%
Percentage annual change in Sensex; average for the year till 2007 and one-month average for 2008

Shining again
Year 200812.6% 
Year 20058.7% 
Year 2006 35.9% 
Year 200715.5%
Jan 200833%
Percentage change in gold price has been calculated on year-on-year basis except for 2008, where it shows a one-month change

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