Can gold hit the Rs 20,000 mark?

Posted On Wednesday, Dec 16, 2009

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Sure, gold can hit the Rs 20,000 per 10 gm mark.

At any point in time, the price of gold in Indian rupees is a function of the price of gold expressed in USD (the base currency for pricing gold globally), which is then converted to Indian Rupees based on the prevailing USD to INR foreign exchange rate.

Gold prices denominated in dollars have increased very sharply and have inched closer to the $1200 per troy ounce mark.


The appreciating Indian Rupee has, to an extent, led to some disappointment by reducing returns for the Indian investors. But not much, gold prices have surged above the Rs.18,000 per 10 gms level giving a total return of 32% from January 1st, 2009.


Investors are confused with different price predictions by various experts for:

  1. their expectations on price of gold and
  2. the possible foreign exchange rate between the USD and the INR.

Given below (Table 1) are various scenarios of the price of gold in INR based on for varying levels of the US Dollar price of gold and the USD – INR exchange rate.


Table I: How gold can touch Rs 20,000 per 10 gram
Quantum Mutual Fund_GoldenTruth_How gold can touch Rs 20,000 per 10 gram
* Gold prices in INR are inclusive of all the duties and taxes applicable in Mumbai (The above given table is only for information purposes.)


According to Table 1, with gold hovering just short of the USD 1,200 per troy ounce level ($1185 to be precise) and the exchange rate of the US Dollar buying INR 46.46, the price of gold per 10 gms in India has moved beyond the Rs 18,000 level.

So, if gold prices surge by, say, 11% to USD 1,315 per troy ounce....and the USD to INR fx rate remains steady at the present levels, then the price of gold can cross Rs 20,000 per 10 gms.


Or, conversely, if the price of gold inches up to USD 1,200 per troy ounce and the INR loses value against the USD to a level of USD 1 = INR 51 then, yes, the price of gold can move to the vicinity of Rs 20,000 per 10 gms.

What may also happen, though, is that price of gold does increase to, say, USD 1,300 per troy ounce (this is 31 gms approx.) but the Indian Rupee may gain against the US Dollar (as it has this past few months) and the price of gold measured in Indian Rupees may not move up by much.


So, take your pick of where you think the USD price of gold will be and where the fx rate of the US Dollar against the Indian Rupee will be, and use the data in Table 1 above to figure out where the price of gold in Indian Rupees per 10 grams will be. 

Whatever the permutations and combinations you come up with, don`t forget to ensure you own some gold in your overall portfolio.

Remember, in the year 2007 the theory was that the Indian Rupee would strengthen to INR 30 for every 1 US Dollar.

Well, all the brilliant economists got that wrong.
The INR slipped to Rs 52 by March 2009 - it went in the opposite direction. The INR weakened.

Also, about 10 years ago, the Australian and Swiss central banks sold about 30% of their gold reserves.
Gold, as an asset class, was declared to be dead.

Or so they said.
Gold has risen by more than 300% in price in USD terms since then.

And a very powerful entity in India seems to agree that gold is still a valid and viable long term asset to own.

Our very own conservative - and sensible – Reserve Bank of India has recently bought gold at USD 1,045 per troy ounce.


So check out Table 1 above and have some fun making whatever assumptions you want.


But don`t forget the simple message of the Path to Profit: “Always Invest Across Asset Classes.”
Buy some gold.
If you don`t have any gold, don`t buy everything in one trade, in one day.
Buy it over the next 36 months.

But read the offer document of Quantum Gold ETF and start making your allocations before the Chinese and the Russians start buying more gold. Because, by then, it may be too late.



Disclaimer:

The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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