Posted On Wednesday, Nov 04, 2009
There must be something about this shiny shimmery metal that’s keeping its worth moving up. If you thought this commodity was already performing well, brace up to hear the latest update: During the past few days gold prices have climbed by almost $50, zooming to test and cross the psychological mark of $1,000 / ounce. Converting to INR, it means that gold prices leaped above Rs.16,000 per 10 gms!
What you see below is a representation of how gold prices have had an "upside breakout" from their so-called "consolidation" mode (ref: Chart 1). Technical experts suggest that prices now have a fair probability of testing the all time high of $1,030 and further increasing to new record levels, which is a justifiable estimation considering global inflationary fears and expectations of the US dollar weakening.
Chart 1: Gold Prices (in USD)
According to the markets, ‘Safe Haven’ purchases from investors seeking to move away from risky assets, is the primary reason for this gold move. Adding to this movement, fresh investments pushed the gold market through the top of the consolidation pattern at $975. Presumably, investors are getting increasingly wary about the recent rally in risky assets (like equity shares) and are using gold as a hedge against the possibility of a correction. Another interesting expert opinion is that China is purchasing more gold for its currency reserves and is encouraging the purchase of gold by its locals as a lucrative investment vehicle.
With the macro factors continuing to be supportive of higher gold prices, investors should have seen some decent gains by now and can expect some more good news to follow.
We also observed that Indians sold a lot of personal gold earlier in the year. With prices topping Rs.14000, people started queuing up to sell their gold assets, and it was no surprise either when the queues grew longer once gold touched Rs.15,000 / 10gms.
For those who thought that these record prices were unsustainable, selling personal gold was a move to mainly lock-in profits; so-much-so that some even sold their holdings at a steep discount in the physical market. Scrap sales numbers from World Gold Council showing big sales from India earlier during the year, further confirm this trend.
Unfortunately though, the investors who were waiting for lower prices to allocate some portion of their portfolio to gold, could now be chasing higher prices as they continuously increase their "buying price targets" only to see prices move further away.
So, is there still some hope for these potential gold investors? What should they do next?
Yes, you heard us right: It’s not too late as yet...
The fundamental factors are still as relevant. The demand supply mismatch can possibly force prices to move much higher if investment demand from investors and central banks seeking diversification continues at current pace.
Chart 2: Gold is under owned
Source: World Gold Council
As seen in the above Chart 2, investments in gold still constitute a very small pie as compared to investments in stocks and bonds. The small size of investment in gold demonstrates the potential for a shift of money into gold. If gold were to become a more mainstream asset, if a small percent of the cash held in money market funds and savings were re-directed towards gold, then the impact on gold prices would be profound.
Gold prices have the potential to increase further to new record levels. Even the inflation adjusted peak in gold prices is around $2,300. Many experts have predicted gold price to rise in excess of $1,500 - $2,000 levels.
It’s simple; if you do not own gold as a part of your portfolio, you should buy some. This will help you gain from the potential increase in gold prices, especially during times of global economic and financial crises.
But - the eternal question - is this the right time to buy gold?
If you have not bought an adequate exposure to gold and are still looking to allocate more, use any pullback in gold prices as an opportunity to add more gold to your portfolio. Or, you could decide to keep allocating to gold on a gradual basis (every week, every month) and reap the potential benefits of any increase in gold prices and minimise the losses in case gold prices head south.
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.
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