Gold holds its glitter

It has provided among the best returns on investment

BY Siddharth Kumar
Delhi

India is the biggest consumer of gold in the whole world

With gold prices charging north, Indian marriages have become expensive. The yellow metal, which plays a fundamental role in the marriage ceremony and is seen as a symbol of security as well as a sign of prosperity in India, is hovering around $1,390 (nearly Rs 63,000) an ounce in the international market and at around Rs 20,500 per 10 grams in local markets.

While the soaring price of gold may be spoiling marriage budgets of many Indian households, from an investor point of view returns from the metal this year has outperformed equity, which is considered as the quickest route to make money. In just one year, the value of money invested in gold has significantly grown, by 27 per cent, while the Bombay Stock Exchange’s benchmark Sensex -- the performing index among top 10 global indices – appreciated just 17 per cent during the same period. Over the past 10 years, the value of gold demand in India has increased at an average rate of 13 per cent per year, outpacing the county's real gross domestic product(GDP) growth by almost 6 per cent, according to World Gold Council (WGC). India is the world's largest gold consumer market.

Festivals, economic growth, gold's attraction as an investment and a good monsoon are key reasons for the likely rise in domestic gold prices. In the near term, gold is likely to remain elevated and will take cues from dollar movements, brokers said.

Gold is set for a 10th annual gain and analysts forecast it may hit fresh record highs by early next year as concerns over fiscal imbalances and currency tensions will continue to support investment demand for it.

Apart from the recent additional $600 billion worth of quantitative easing by the US, the weakening of dollar and associated fears of inflation, demand for the precious metal is also likely to be driven by higher gold price expectations as well as increasing availability and accessibility of gold investment products to retail investors.

“We expect a further rise in the prices of precious metals on account of” fresh worries in Europe “which may boost the metals appeal as a safe-haven investment,” brokerage house Nirmal Bang said in a note. Rising crude oil prices is also fuelling the movement of precious metal in global market, dealers said.

“European sovereign crises and geopolitical tension between North Korea and South Korea boosted demand for gold,” ICICI Securities said in a note on Tuesday. Praveen Singh, a research analyst at Sharekhan Commodities, is bullish on the outlook of gold and said that in “the present uncertain economic scenario, we think the yellow metal can reach $1,440 level easily in the next few months.” Gold made fresh all-time high on December 6, touching $1,424 per ounce, and has witnessed some profit-booking at those levels.

A patient investor, who parked savings in gold at the beginning of passing decade, would have made five times the initial investment.

Dealers in Mumbai said a fresh surge in demand is expected in domestic market by the middle of next month when Makar Sankranti festival marks the start of winter-sown crop harvest. The wedding season is already on and demand for jewellery is supporting further rise in the gold. India contributes to almost 15 to 20 per cent of world demand of gold and most of this is in the form of jewellery, said Tanushree Mazumdar, senior economist at National Commodities Exchange (NCDEX).

The demand is increasing in the world’s two largest markets, India and China, as rising income levels, high savings rates and strong economic growth continue to push up consumption.

To reap the benefit in the value of shining metal, financial planners too are advising people to have a minimum of 10 per cent to 20 per cent exposure in gold as part of an asset allocation strategy.

“Gold provides hedge against inflation in your portfolio and is a must for a diversified assets portfolio,” said Sejal Patel, a financial planner at Bonanza Portfolio Ltd. Small investors too are missing the golden chance to make money via exposure of their savings in the precious metal. Retail investors in India are diversifying their investment in gold by investing in gold ETFs (exchange-traded funds), which are basically mutual fund units where the underlying investment is almost exclusively in gold, said Mazumdar. “Though currently the size of the gold ETF market in India is small, but for trend-spotters, tracking investment gold ETFs would be an interesting exercise. It would also be one of the factors to look into when trying to analyse factors affecting demand for gold in India,” she added.

Investors who do not hold gold or view it purely as a temporary safe haven asset are failing to harness its full potential to protect wealth, says a study published by WGC. According to WGC forecast global gold consumption for 2010 will be higher than 2009 as a result of increasing levels of demand in India and China, sustained global demand for gold investment, together with growth in jewellery and industrial demand.

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