By Shiv Krishna As global markets are caught in a tangling web of unprecedented turmoil, there is a glitter in the yellow metals market. Gold prices are setting new records every day.
As markets opened on Friday after a dull holiday, the Bombay Stock Exchange benchmark index—Sensex—fell to the nadir of desperation by plunging 1000 points and touching the 10000-mark.
But as brokers and traders cried over the markets that are in misery, gold prices set new record as the yellow metal soared to new highs following the global recession. Gold December Futures at MCX gained 3.86 per cent at Rs 14,130 per 10 gm on Friday morning.
The February 2009 contracts at MCX also rose by 3.73 per cent at Rs 14,195 per 10 gm. At NCDEX, the October Futures soared to Rs 14,004 per 10 gm, a rise of 3.47 per cent. The November contracts gained 3.64 per cent at Rs 14,085 per 10 gm at NCDEX.
The December Futures at NCDEX however witnessed a fall of -1.1 per cent at Rs 13,760 per 10 gm.
Why is it that gold prices shoot up when financial markets are plunging to historic lows?
Traders said concerns over global financial markets and depreciation of Indian Rupee have created an appeal of gold as an alternative investment for many people in the country. On Wednesday, gold touched a new historic high of Rs 13,820 per ten grams in the Mumbai market. In the global market, gold prices touched at $ 925 per ounce.
Investors are looking at gold to moderate some of the risks in their portfolio. They are concerned mainly about counterparty risk, market risk and liquidity risk. Although gold does not necessarily remove the counterparty risk but negative real yields—the difference between interest rates and inflation—are also another reason to hold gold.
Gold has so far been immune to the financial crisis except when dollar strengthened which made investments in gold less attractive. Gold hit a record high of $1,030.80 an ounce on March 17 and slipped to below $740 on Sept. 11 as the dollar rose and inflation worries receded.
One of the reasons behind the gold price surge in recent times has been the fall in value of dollar which made commodities priced in U S currency cheaper for holders of other currencies. But the dollar has staged a recovery as currency markets realized banking sector problems were contagious and would not be confined to the United States.
From 1998 to early-2002, gold prices stayed mostly below $300 per ounce with heavy central bank selling and little interest from investors. In April of 2002, prices broke above $300 and eventually traded their way to $1,000 per ounce by March of 2008. This has been an incredible climb and it is hard to say if it is over yet or not as world production is not increasing. The current range appears to be between $700 and $1,000.
