Posted On Friday, Nov 27, 2009
Gold has broken the USD 1,100 barrier, and many chartists and technical analysts now believe that its momentum at present looks unstoppable.
The purchase of 200 tons by the Reserve Bank of India - a respected and conservative central bank - has only contributed towards lifting this sentiment. The price of gold gained nearly $70 since the announcement in early November.
With fundamentals (mainly the printing of money by central banks and government deficits) still favorable for a long term uptrend to prevail, investors may be rushing to make their allocations.
For the Indian investor, the appreciating rupee has taken some sheen off the returns from an investment in the yellow metal.
In 2009, the price of gold has increased by nearly 30% denominated in dollar terms whereas for the Indian investors it has been "only" 24%. Also, when measured in Euro, the appreciation has been "only" 22%. This is because while gold is priced in US Dollars, the returns that we calculate are based on our "home" currency. And cross-currency rates (how many INR can be bought by one USD) also fluctuate.
Over the past few months, we have seen the dollar depreciate vis-à-vis most of the global currencies. This means that currencies like the Indian Rupee and the Euro have gained in value; they have appreciated against the US Dollar.
As gold is traded internationally in dollars, any increase in the value of the rupee will push down the rupee price of gold. Simply put, the appreciation in the rupee against the dollar has eroded some of the appreciation in Indian gold prices - Since the beginning of the year, gold has gained by 30% internationally (in dollars). During the same period, the rupee has gained close to 6 % against the dollar.
Table 1: Gold goes up, but a strong rupee removes some of the gain (2009)
|Change in Price of gold in US Dollars||+ 30%|
|Loss in value of US Dollar against the Indian Rupee||- 6%|
|Net change in the price of gold when measured in Indian Rupees for an India-based investor||+ 24%|
As can be seen in Table 1 above, the rupees appreciation is capping the upside in gold prices.
Chart I: Comparative Gold Prices in USD, Indian Rupee, and Euro
There are 2 reasons for the appreciation in Indian Rupee:
First, as the dollar depreciates vis-à-vis most of the global currencies, it does so against the INR. Exponential increase in U.S monetary base to support various stimulus measures and rising deficits is resulting in perceived weakness for the greenback.
Secondly, the India story is drumming up a lot of followers internationally. Foreign fund houses are eager to be a part of this growth story, especially when the developed economies are faltering in their growth, and thus are bringing dollars to India to invest. YTD net inflows from FIIs in India have been more than $15 bn.
This increased money flows and perceived weakness in the dollar is leading to an appreciation in the Indian Currency.
Chart II: FII flows and INR
Chart III: Gold in India shines more
Source: Bloomberg (* as on October 2009)
Would you want to lose out on an asset that has delivered reasonably good returns over the long term?
Also, gold is an asset that tends to protect your purchasing power and acts as a store of value, and tends to be a hedge against uncertainty and crisis.
Do you want to take a chance and not be in gold just because of the small appreciation in the rupee? Dont get carried away by the short term, instead keep in mind the long term potential and likely probability of both Gold and the Indian rupee.
Dollar depreciation or rather debasement of fiat currencies by policy makers, longer term inflationary concerns and increasing diversification of reserves and investments into gold will see gold prices reach significantly higher.
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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.
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