Yellow metal may get too hot to handle

Caution is the word as punters, HNIs & retail investors take fancy to gold

GOLD may be booming as other investment avenues lose their lustre, but getting too close to the hot metal now comes with a serious health warning for investors: you may end up burning your finger.
    As seasoned punters, high net worth individuals (HNIs) and increasingly retail investors flock to grab the yellow metal, the prices of which have jumped 50% since October 2008, as an investment option, analysts caution that there may be a big bubble building in the commodity renowned for its reputation as a safe-haven asset.
    "Waking up to gold today is like waking up to stocks or real estate in 2007. Investors are chasing short-term performance," says Dhirendra Kumar, CEO of Value Research. The domestic retail market for gold, which usually hits a peak during the October-March Indian wedding season, is already showing signs of weakening demand because of sky-rocketing prices.
    Analysts say investors in gold cannot take the long-term prospects of the metal for granted. The graph of the yellow metal almost mirrors the recent surge in crude oil and stocks. Both saw hot money flowing in, but the bubble eventually burst taking down investors with it.
    "Gold will not derive a high value in 10-20 years, which people perceive it to. The younger generation doesn't fancy gold; they are more attracted by diamonds and artificial jewellery. So the demand is going to take a dip in India," says Vikas Vasal, executive director of KPMG, who tracks personal finance trends. Sunil Sinha, senior economist at credit rating agency Crisil, says the yellow metal is meant only for investor with high-risk appetite. "It is very difficult to time such rallies. It is advisable that the common man should stay away from gold. With all the investment options drying up in recession, it is the hot money which is flowing to gold now."
    However, with gold funds outperforming all other asset classes by far, the rush looks here to stay for some time. The Russell Global Gold Fund recently delivered a return of 121% for the four month period since October 2008. Most of the Exchange Traded Funds (ETFs) in the commodity are up over 30% in the last three months.
    Vikas Bansal, who runs a stock-broking business in Ramnagar near the Corbett National Park, says even small towns are not immune to this trend of gold as an investment option. "The kind of volumes gold is generating reminds one of the launch of the Reliance Power IPO in January 2008 when the equity markets were at its peak. Those who got there late burnt their fingers as the market tanked within months," he said.
    Industry body Assocham predicts that gold prices are likely to touch Rs 17,000 per 10 grams by August, up from around Rs 15,000 now. Value driven by financial players
INVESTMENT advisers say the value of gold is increasingly driven by pure financial players such as hedge funds and commodity funds trading in paper contracts and has little to do with genuine demand and supply factors in the physical market. It is a financial asset and is clearly subject to the same volatility as other financial assets as investor interest flows in or out, they caution.
    Gold volumes jumped by more than 25% at Multi Commodity Exchange (MCX) in January compared with the previous month. Gold saw a turnover of Rs 186,123 cr in January, as against Rs 148,735 cr in December last year. India imports around 60% of its gold requirement, making it particularly vulnerable to global volatility. Investors betting prices will rise further could do well to be mindful of rumours that the US government may part sell its gold reserves to back up its stimulus spending, which could trigger a price slide. A senior commodities exchange official, who asked not to be named, pointed out that ever since Barack Obama took over as US President, gold prices have been on a northbound journey. "The US government may use this tactic as a short-term measure and buyback gold afterwards," he said. US has the highest gold reserves in the world, amounting to around 8,000 tonnes.