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The yellow metal recorded an all-time high of $1,180 per ounce on the London Metal Exchange, while in the domestic market it crossed the Rs. 18,000-mark per 10 gm on NCDEX.
In the futures market, too, prices were at an all-time high of Rs 17,662 per 10 gm. In the spot market the yellow metal gained over Rs 150 from its previous high levels. Gold futures in New York have risen 12 per cent since India bought 200 tonnes of IMF gold on November 3, paying $6.7 billion.
The FC report that, subject to acceptable terms, the Reserve Bank of India may well buy 201.3 tonnes more from IMF was the main reason behind gold prices rising on Wednesday, the head of commodities at Geojit BNP Paribas, Alex Mathews, said.
RBI governor D Subbarao declined to comment on the FC report, but market analysts and World Gold Council said it made perfect sense for India to buy more from IMF and stock up gold as a part of its forex reserves. “Since the dollar is losing value, RBI’s strategy must be to invest in an asset that is increasing in value in the long run,” the director of the National Institute of Public Finance and Policy, M Govind Rao, said.
India will become the eighth largest holder of gold, overtaking the Netherlands and Russia, if it mop ups the remaining 203.1 tonnes of IMF gold on sale.
Wealth managers and financial planners said even at these prevailing high prices, it could be rewarding for investors to go in for gold or exchange traded funds (ETFs) in gold. Gold buyers in any case were rushing in and advancing their purchases, anticipating a further price spike. According to the chief advisor of Tamil Nadu State Jewellers Federation, L K Syed Ahmed, retail sales have risen by 20 to 30 per cent in the past 15 days.
“Despite high prices, buyers are convinced of the upward trend in the market. People are even advancing their gold purchases and we see buyers pulling out their money from other investments and putting it in the yellow metal. The sale of gold coins is also higher by 10 per cent,” he said.
In the 22 days since RBI’s November 3 purchase, ETFs linked to gold have gained nearly 11 per cent. Gold ETFs which mirror gold prices in the past one year have also scaled new highs. Exchange traded funds like Benchmark gold, Kotak gold and Quantam gold have clocked returns of 32.92 per cent, 32.46 per cent and 32.35 per cent, respectively. The assets under management of the ETFs in September totalled Rs 1,006 crore.
Gold ETFs of UTI, Kotak, Benchmark, Reliance, Quantum and SBI rose by between 10.84 and 10.96 per cent between November 2 and 24, according to data from ValueResearch.
The investor sentiment is reflected in gold scrap sales too. According to the vice- president of the Bombay Bullion Association, Harmesh Arora, despite the higher prices not much gold scrap is coming into the market. “People are waiting for the prices to move up to Rs 20,000 to sell their old gold. They are holding on to their reserves for now,” he said.
Gold has performed strongly over the past 18 months and is now trading at levels not seen since the second oil shock-driven boom of the late 1970s and early 1980s (on an inflation-adjusted basis). The head of commodities at Angel Broking, Amar Singh, said the gold market was bullish as global inflationary fears were high (gold is seen as hedge) and US Federal Reserve had stated that it had no intention of hiking interest rates in the near future. The dollar had been weakening against major currencies, triggering the bull run in gold. The dollar was expected to further weaken in the coming days, he said.
Buying of more IMF gold by India would definitely heighten the already bullish market sentiments, said the head of research at JRG Wealth Management, Harish Galipelli.
“The overall trend is looking very strong and gold breaching $1,200 is not too far. But retail investors should be extremely cautious as corrections at this level can be as steep as $50 or $60,” Galipelli said.
The managing director of the World Gold Council (India), Ajay Mitra, said India’s exposure to dollar was relatively high. It would be a good idea for RBI to buy more gold from IMF and strengthen its gold reserves. “We too had made representations to the government in February 2008 asking it to cut its dollar exposure,” he said.
“Rising inflation is always a time when investors would use it as an investment tool, as paper currency will loose its value. Central banks around the world have shown interest in gold,” said a senior analyst with Geojit COMtrade, Anand James.
“We have been asking investors to strongly look at gold as an asset allocation tool for the past six or seven months. One definitely needs to allocate 15 to 20 per cent of assets. Despite high prices, inflows into our gold ETF have been good. It’s an insurance for any financial portfolio and will act well both in terms of uptrend as well as downtrend,” Lakshmi Iyer, vice-president and head of fixed- income and products at Kotak Mahindra Mutual Fund, said.
Many analysts and industry experts have set a near-term price target of $1,200-$1,300 an ounce and a medium-term target of $2,000. Commodity guru Jim Rogers, chairman of the Singapore-based Rogers Holdings, who predicted the start of the commodity rally in 1999, expects gold to rise to $2,000 an ounce over the next decade.
According to him, the key drivers of the rising interest in commodities, including gold, from investment funds in recent years has been a major factor behind bullion’s rally to historic highs. The currency market also played a major role in the setting the direction of the gold as bullion prices move in the opposite direction of the dollar.
RBI’s holding of reserves in the form of gold went up to 557.7 tonnes after it the purchase from IMF. RBI’s gold holding went up to 6.2 per cent of its total reserves from 3.7 per cent. Its foreign exchange reserves consist of foreign currency assets, gold, special drawing rights and funds kept with IMF.
(With inputs from Kumar Shankar Roy in Kolkata, Prashant Mukherjee in New Delhi and Rajendra Palande and Manju AB in Mumbai)
