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Yellow metal's golden run

By Vishesh Sharma, Shashikant Singh | 8/29/2011 2:14 PM Monday

Kamal Gupta is a seasoned investor in the market. He has been investing in equity as well as other asset classes for a long time, and has been investing quite cleverly all through. Nevertheless, he has faced problems of not booking profits on time and has even lost money at times. However, thanks to the current market situation, he too has joined the ranks of confused investors, who are finding it difficult to read the wild market swings. Grappling with frequent ups and downs in the market, Gupta has been finding it tough to park his funds. To top that, factors such as the US downgrade and the European debt crisis have not helped him either.

This is certainly not a one-off case. There are many like him, who are frustrated and waiting for the markets to present a clearer picture. Such is the situation now, that even the masters of the trade are facing tough times while predicting trends.

The equity market, which is supposed to offer better returns in the long term, has not been helping general investors for quite some time now. The returns for the last 10 years in equity, as represented by the S&P500, have been negative. This trend may now extend to other developed equity market returns as well. The recent volatility in markets the world over is making the situation worse. The recent Federal Open Market Committee (FOMC) meeting appears to recognise this fact, since the Fed Reserve (US Central Bank) has stated its intention to maintain status quo on the interest rate scenario until 2013. Even property and other commodities, as asset classes that are tightly linked to the economic cycle, are not providing any solace to the investor. In the current situation, gold is the only asset class that is offering some comfort to investors.

The Rise Of Gold
Gold has long been touted as the ultimate safety net against hard times. And if the purchase of gold by central banks is any indication of this fact, than we find that central banks around the world are again buying gold as a preferred reserve. Historically, gold prices rise when currency values and interest rates fall. Since the US sovereign debt down-grade and the new threats emanating from the Euro zone economies, gold has rallied around 14-15 per cent in August 2011 alone, as investors shunned stocks and flocked to the yellow metal as a safe haven. It must also be stated here, that over the last 10 years, from August 2000 to August 2011, gold has been the best investment (yielding returns of 550 per cent), outperforming even equity, bonds and property.

Having said that, it would be interesting to mention that the yellow metal’s recent upward mobility has even gold enthusiasts (commonly known as ‘gold bugs’) and precious metals analysts watching in wonder at the commodity’s latest high-wire act. Some say that a price correction is imminent and in fact, long overdue. Others maintain that gold’s next great historic run is just getting started. However, the question remains as to what an investor should do, now that the metal is at a historic high of over Rs 28800 per 10 gm.

We believe that since the value of gold is measured in a currency which itself is not static, there are other ways to measure whether gold has reached a historic high. According to a report by Deutsche Bank, the gold price would need to appreciate to USD 6400/ounce (1 ounce=28.34 gm). Looking at the various factors that are in play, we would say that there is a lot of room left for appreciation of gold prices from here on, at least in the short run.
So, What Should You Do Now?

Of course, gold as a commodity does not produce earnings or pay dividends or coupons. Its value is set by supply and demand. You could hold gold for years, without worrying about inflation. Gold prices automatically take care of inflationary trends.

 

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