Gold price has been rising at a staggering rate these days and shows no sign of stopping. As of beginning of November 2009, gold price has touched $1090 per ounce(31.1 gm) or Rs 1650 per gm. In terms of Indian Rupees it rose by 45% over one year period, 167% over 5 years period and a whopping 306% over 10 years period. If you had invested 1 lac in this precious metal back in year 2000, you would have been able to sell it today for 3 lacs assuming your investment was in pure gold or some alternate form of gold investment such as exchange traded funds (ETF).
If you think that that was a smart investment then consider this. If you were a real smart investor and you had invested the same 1 lac in the Indian stock market over the same 10 year period, you would be sitting with a handsome profit of over 6 lacs! This assumes that you timed your entry and exit really well and had invested when Sensex (Indian stock market index) was the lowest at 2600 in Sep 2001 and had exited the market when it hit the highest at 19080 in Dec 2007. Quite a Himalayan task for even a seasoned investor. However those who can not stomach the roller coaster ride in the stock market, besides being a liquid asset, Gold remains as a safer bet.
Will gold price continue to rise? What is causing this precious metal to continue its bull run? Let us look a little deeper into the bull run of this fascinating yellow metal.
Gold is purchased by the world for three reasons. Firstly for consumption as jewelery, secondly for industrial purpose and thirdly for investment. The world consumption of gold is about 3200 tonnes out of which India consumes 25% or 800 tonnes a year. Over recent months analysts have started to speculate about the potential for China to overtake India as the world's largest gold consumer. In terms of the cultural affinity towards gold, it is fair to say that India tops the list globally and this is unlikely to change.
Historically there is a correlation between the price of gold and strength of U.S Dollar. Now to understand the rise in price of gold we have to look at the performance of the U.S Dollar against other world currencies. The US Dollar has hit a rough ride as evidenced by a 30% decline since 2001 in the U.S. dollar index (The USD Index measures the performance of the US Dollar against a basket of currencies: EUR, JPY, GBP, CAD, CHF and SEK) . Analysts see room for further decline in the dollar.
According to data provided by World Gold Council, there is a decline in consumption of jewelery on a quarter on quarter basis comparison between 2008 and 2009. So it is clear that what drives the gold demand is the investment aspect of gold. During a time of uncertainty in the stock market coupled with weakness in the dollar, investors turn to commodities as safe haven and gold tops the list.
Having said that, here are a few reasons why gold is going to outperform in the near term.
Despite the recent rally, the gold price is still 110% below its inflation-adjusted 1980 high of $2,300 per ounce. So it certainly has more leg to continue this bull run.
The Stimulus side effect: According to Bloomberg, the stimulus plan will pump $9.7 trillion into the economy. Experts believe that the monetary stimulus efforts will cause a rise in inflation, which in turn will drive gold higher.
China joining the party! China just revealed that it has doubled its gold holdings to 1,054 tons. Yet that still only equals 1.6% of its overall reserves. As China moves out of U.S. Treasuries and into gold, this will help fuel the next leg of the run-up.
The greenback's 30% Drop: Since 2001, the U.S. Dollar Index has tanked 30%, while gold has risen 300%. With all the downward pressure on the dollar, and inflation on the way, this trend is about to pick up steam.
Riding the “Commodity Super Cycle”: Commodity expert Jim Rogers expects the Commodity Super Cycle to drive commodity prices higher for another eight years including gold. And he’s stockpiling the yellow metal by the day. Rogers says, every pullback is another buying opportunity. Considering he’s been dead right on every major trend of the past 40 years, one can't help but pay attention to him.
Rajesh Kumar
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