BULLION

Gold prices have touched an all-time high. It's still a good time to buy the precious metal as prices are expected to rise, though at a lower rate than in the past few years.

When ET Wealthcame out with a story on gold, 'Now is the time to pick gold' on 28 March, we had written about how the price of gold would reach 21,700 per 10 gm over the next two-and-a-half months. It's flattering to be proved right. But it has also been a humbling experience as we got our timeline wrong and underestimated the lure of the glittering metal. Exactly a month later, on 28 April, the price was 22,470 per 10 gm. And it continues to shoot upwards. The price of gold is touching new peaks and the boosters that are pushing it forward are firmly in place.
    The US economy continues to stumble and there doesn't seem to be any hope that it will find a firm footing soon. The Eurozone crisis virus seems to be spreading wider and faster, with no antidote in sight. The unrest in Middle East and North Africa is gaining momentum. Oil prices refuse to cool and production in Libya has almost come to a standstill. Iran, which currently holds the rotating presidency of Opec, is dithering over meeting before the fixed date of 2 June to discuss increasing the supply of oil and, hence, bring down the prices.
    The bleak international financial scenario is why investors are preferring to place their faith and money in a 'hard' asset rather than paper currency. It's also the reason new investors are streaming towards this asset, leading to an increase in its demand. China's appetite for gold is almost turning into a gluttony and central banks across the world are veering away from the weakening dollar and boosting their bullion reserves. "Gold is the only currency that cannot be printed and supplied. It's a mined product and the huge gap between demand and supply will continue to push up prices," says Lakshmi Iyer, head of products, Kotak Mutual Fund. "If the public debt in the US is not contained, the dollar will continue to depreciate. Gold will then become the proxy candidate and will be in high demand. Inflation is already on the rise in emerging markets, with oil and food prices going up, and it has now begun to inch up in the developed markets too," says Devendra Nevgi, founder and principal partner, Delta Global Partners. As higher oil and food prices drive up inflation, inflation-adjusted interest rates remain negative. So, investors don't lose out if they hold a non-interest bearing asset, such as gold.
Is it time to book profits?
It will be, but after more than a year. If you're interested in selling gold, be patient because prices are going to continue moving upwards. However, don't expect them to gallop as they did last year. "The price of gold will be up by 10% by the end of the year. The dollar is weak, global interest rates remain low and equities are lacklustre. So, investors are bound to flock towards gold," says Jayant Manglik, president, Religare Commodities.
    In a research report released recently, Goldman Sach's gold forecasts are $1,565 and $1,690 per ounce in six and 12 months, respectively, while Deutsche Bank's price outlook for this year is $1,571 an ounce. According to SMC Comtrade, the price in India is likely to touch 23,200 per 10 gm in the next 4-5 weeks.
    Other analysts predict that the rise could be much steeper. "The price will rise another $200 an ounce, reaching $1,700 by the end of this year, and it could surpass $2,000 an ounce in 2012," says Renisha Chainani, deputy manager for commodities research, Edelweiss Financial Advisors.
    As prices rise, it is possible that the demand for jewellery will taper down. However, the investment demand is unlikely to decline as the uncertain times are making everyone jittery. This is why as the price keeps rising steadily, so does the demand. "In the past few years, each time gold prices reached big round numbers—$1,000, $1,200 or $1,400 an ounce—buying interest abated a little. But now, even with the price at an all-time high of $1,500 an ounce, physical demand remains firm. Most consumers and investors believe gold will hold its purchasing power. After all, it can't be manufactured at the whim of a central bank," says Chainani.
    While most experts suggest that gold should form 10-15% of an investor's portfolio, others are more bullish. "Currently, you could increase your bullion holdings to 25% of your portfolio by starting a SIP in e-gold. When the situation changes, re-balance your portfolio," says Manglik.
What could bring down the price?
A few factors, such as lower oil prices, a rally in the global markets and stability in the Middle East and North Africa, could slow down the pace at which the price of gold is rising. However, the first sign that prices are going to come down is when interest rates rise. Most people prefer investing in deposits as they earn an interest on their money. On the other hand, gold lies idle and earns no dividend, coupons or rental income, unlike other asset classes. So, when interest rates rise, investors move towards fixed deposits (see graph above). This could lead to a fall in the demand of gold and, hence, a correction in its price.
    "A key indicator will be the improving health of the US economy and the strengthening of the dollar," says Manglik. However, a weak dollar is favourable for us as it makes dollar-priced gold cheaper in India. So the rise in price of gold in rupees will not be as high as in the international market.
    Also, as the price of gold shoots upwards, 'scrap' gold, the metal that is resold to jewellers, starts coming into the market. Though this increases the supply and may dent the price rise, the margin by which it does so is not significant.
    We would like to be right on target this time around, but just in case gold stumps us again, we're heading straight to the nearest jeweller.