Last Updated :
30 September 2009 at 15:15 IST
Investors refuse to dump gold
MUMBAI (Commodity Online): Investors’ new mantra is
Gold and realty.
In India, always conventional wisdom favoured that gold and realty prices must go up in the long run for the simple reason that they can never come down over such a period.
Even rural India considers both of them to be safe investments and this is ingrained in Indian psyche. They also help to buffer against inflation and bring in capital appreciation to levels comparable with those on the stock market.
However, while the long-run direction is clear, inter-temporal variations affecting them are quite different even though demand is typically from the same segment of users.
Gold has been quite volatile in the last few years and has offered commensurate returns. Further, gold is not correlated with stocks meaning that it is a good product diversifier.
The price of gold is inversely related to the dollar and typically, the weakening of the dollar strengthens gold. The recent race past the $1000/ounce mark was a direct result of the weakening dollar which has inched towards the 1.50 level (vis-a-vis euro).
However, while India is the largest consumer of gold (20% share) it still remains price taker and not price setter which should have been the case.
Hence, while at the margin, prices domestically are affected by demand factors, there is not much deviation from the international price with the correlation remaining above 95%.
The physical balances do matter at times, especially on the supply side when there are larger quantities in the market. However, the main source for the same, i.e. releases by central banks, is more or less controlled to ensure that there are no serious distortions in the market.
The rising price of gold, however, does not deter consumption as it is purchased essentially for its quality of store of value and for purposes such as marriage, social mores and egotistic wealth.
Demand tends to be fairly inelastic most of the time and demand is almost a straight line. Conjecturing the price of
Gold really means knowing how the dollar will move.
This is tricky today as the dollar is declining despite the US current account deficit improving. This is so because global sentiment is adverse on account of the high risk perception of US assets. Countries are holding fewer dollars and have switched to the euro.
MCX CORIANDER 15 February 2012
contract was trading at
Rs 4173 . What's your view on it?
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