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Gold may not be too glittery in near future !

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We have recently witnessed a boom and a bust cycle in global stock markets on the back of financial crisis. During this crisis of sentiment, the investors were found rushing to park their investments under the safety belt of glittering Gold.

Shelter under Safe Haven Gold

In fact, even some of the sovereign funds from countries such as India and China had to seek shelter under investments in Gold in order to diversify their foreign exchange reserves, away from the US dollar denominated assets.

US-dollar-Gold-prices

But, now there are chances of even gold going bust after witnessing a scorching bull run in the past decade and the possibility can’t be ruled out that the investments at the higher end of the commodity prices may be stuck once the cycle turns over head. So, better watch out!

According to the Gold Survey 2010, Gold is nearing its final phase of its 10-year bull run. However, before the cycle going bust the gold prices could climb higher around $1300 an ounce in 2010 driven by high investment demand.

Drop in Jewellery Demand of Gold

The survey further says that the jewellery demand has dropped to less than half of total demand and that the investment demand in gold could witness a drop at some point in time which could trigger an advent of the last stage of the bull market in gold. According to an estimate, the demand for jewellery forms a big part of the gold’s consumption trend.

During the previous year 2009, the investment demand for gold surpassed jewellery fabrication demand in value terms, indicating that a large part of the demand for gold was on account of seeking safety under the safe haven property of gold during the financial crisis. The consumption of gold for jewellery fabrication has fallen to a 21-year low.

The GFMS survey expects the gold to remain range bound between $1050-1150 per ounce over the medium term horizon before the last leg of the rally towards $1300/oz plays out later during the year.

Expectation of Supply Glut

While the demand for consumption of gold has dropped significantly, the chances of supply side glut can’t be ruled out as well. GFMS has estimated that the mine production has seen a flurry to reach its second highest levels ever, putting a question mark on the sustainability of the higher gold prices. To add to the woes, supply from old gold scrap climbed 27% to 1,674 tonnes in 2009.

However, over the near to medium term duration, the prevailing worries about sovereign debt, currency problems and inflationary issues should ensure that the gold prices remain afloat at higher levels.

An interesting aspect of gold is that as prices move up highlighting the optimism of consumer demand of this yellow metal, the queue at the doors of those traditional jewellery shops witnesses a shortening trend depicting reluctance to buy on part of consumers.

All that shines is not gold. But, probably, even gold (prices) won’t shine forever?

  1. Shaji says

    At present the price for gold Rs.22000/- for 8gm is too high in relation to it’s real worth. Gold is nothing beneficial to human body, still people buying it more and more only as a social status. Diamond, platinum, etc. have it’s own corelation with the user and it could provide more benefits to the user in the long run. But huge percentage of public doesn’t know this and running behind gold only to show their high social status. Some of states in India is still treat this metal as a social high worth on marriage occassions. Still “Gold” is that much worthwhile like these prices?!!!!!(my price = Between Rs.12000-Rs.15000 for 8gms) Mad world don’t run behind this useless metal and to don’t spoil the real world and it’s economy. Go back to real price an save the world from unimagine recessions!!!!!!!!!!!

  2. Financial Spread Betting says

    I’m not so sure. There is still a lot of fear around and the risk of inflation.

  3. Altaf Rahman says

    When I was a child my parents used to say ‘nothing can go wrong with Gold’. All the events till now have confimred my confidence in their words. Gold may not give the returns like stocks but it will never fall like stocks.

    Few of the factors which influence Gold (in addition to standard factors) are
    1) Price of Gold itself :
    a) Mine operations : When Gold prices are high, the mines with high cost of production come alive adding more physical gold to market, thereby reducing prices or rather balancing the demand supply equation. The same applies when prices go down due to over supply. The high cost mines close, reducing physical supply and giving support to prices.
    b) Sale and recycling of gold : When prices are high, gold sale comes down but old jewellary resale will increase and vice versa. However compared to New gold sale, recycling volumes are very less.

    2) International crisis :
    Though at present there is no crisis of importance, we can count on US to create new crisis when ever it suits them. So there is never any shortage of crisis be it Iran or Goldman Sach or any such thing.

    3) Inflation (In India) :
    Presently inflation is high and it is a cause for worry and will help Gold from falling.

    In any case Gold is good as an asset and not as an investment. If you have surplus money, buy gold for your family. This way you will have an asset and the happiness of the family. I dont want to say vice versa which is a different scenario. (When in need of cash, sell gold. You get money but the wrath of your family which far outweighs the positives of getting cash:-)

    Investment in Gold is for far smarter people. I stick to the above para :-)

    1. Viral says

      Hello Altaf,

      Some very sensible comments by you.

      But, apart from the above, let me tell you every asset class goes through cycles of different phases.

      Traditional wisdom says Gold cannot correct by much, but look at the chart attached in this post. The long term charts of last 7 years are good enough to be called as a bull run.

      And, every bull run has to go through a bear phase, irespective of the properties and charateristics of the asset class. What goes up has to come down.

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