By Jay Prakash Gupta
Gold is in a clear bullish trend primarily because of the governments inability to match up the equation of earnings with spending. This is not a local phenomenon but a global one.

When the earnings in the form of taxes and remittances fall short of the spending, central banks take resort to:

Printing more currency
Debt issuance (Sovereign bonds)

Printing more currency leads to fall in intrinsic value of money thereby we pay more for same level of goods & services. US has been involved in printing dollar since a decade to match its rising deficit which in turn led to increase in money supply leading to rise in prices right from commodities to housing to almost every asset class. Seeing an ever rising opportunity Investment banks and financial institutions relaxed risk norms to earn better profitability and thus exposing themselves to the vulnerable world of financial derivatives, the outcome of which is known to all of us.

Why is Gold moving up?
USD started to replace Gold as a sovereign currency after 1961, when the gold standard was removed. With increasing dominance of US in trade and Oil in the Middle East, USD became the preferred currency and economies all over the world preferred USD for its forex reserves. Now with the fall in intrinsic value of dollar due to burgeoning deficits and current state of US economy, countries have started substituting USD with Gold.

Another reason for gold moving up is the falling demand of USD due to lower interest rates in US thereby fuelling “Carry Trades.” The phenomenon Carry Trade is when one borrows money in US at interest rate of 0.25% and invests the amount in other markets and asset classes where returns are much higher. This is resulting in diminishing the value of dollar.

Where is the Gold heading?
Gold in the long term looks to touch $2000 with rising concerns over dollar dominance in the world trade. But, that would take a long time to happen. Correction in gold prices can happen in the short run with the contraction of money supply.

It could happen if interest rates rise or stimulus package is with drawn or dollar starts strengthening against other major currencies. Current fall in Gold prices is due to positive numbers coming from US resulting in recovery in Dollar Index. Gold prices may range between $1070-1080 levels, which also act as a strong support level for Gold.

Jay Prakash Gupta is Head, Commodities & Currency with Unicon Commodities P Ltd

(The views expressed in this article are personal)

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