CARE ratings last week released a special research report that evaluates the prospects of gold as an investment option in the near future. Gold prices are currently trading at historic highs and the report try’s to shed light on the direction that gold prices are headed in the near future. Extracts from the report follow below :
Prospects of Gold as an Investment
Gold has been gaining prominence as an ” asset “ with each passing day. The differentiating factor of gold being that it has a universal market – the size, depth and liquidity of the gold market surpasses that of equities, debt and practically all other asset classes. Moreover, the metal is known to thrive during economic lows and uncertainty.
Gold prices have risen by an astounding 180% in the last 4 years. It has risen by 23% since January 2011 and has outperformed practically all known asset classes in the last decade.
What has been propelling prices?
An array of factors have driven up gold prices in recent years, particularly since 2007.
- Demand for the metal from diverse quarters have emerged attracted to various attributes associated with the metal viz. safe haven investment, hedge against inflation, the poor/ negative correlation with other asset classes, volatile stock markets, absence of default risk (as it is not tied to government finances) to name a few.
- The primary factor attributed to the surge in prices however has been the loss of purchasing power of currencies with the increase in supply of the same as a consequence of the cheap money policy adopted by the developed countries following the financial crisis of 2008 in an attempt to boost economic growth there. The value of the US dollar is a determining factor influencing the price of gold as the metal is priced in US dollars. As such, a weakening dollar makes dollar denominated gold cheaper for holders of other currencies who consequently increase purchases of gold, thereby boosting prices of the metal. The US dollar had depreciated by nearly 30% in the last decade. Given the weak fundamentals of the US economy, the US currency is expected to weaken going into the future despite seeing some strength in recent weeks owing to the surge in investments in US government bonds by risk averse investors.
- In addition, a spurt in central banks gold buying since 2009 after being net seller for over two decades has also contributed significantly to demand and thereby prices. As an aftermath of the financial crisis, central banks have become net buyers of gold and now comprise amongst the largest buyers of the metal.
The year-on-year price increases have not dented gold demand. If at all markets have been seen to use the occasional dips in prices as buying opportunities.
World gold demand grew on a year-on-year basis by nearly 11% to around 4000 tonnes in 2010 alone. India, the world’s largest gold consumer, and China being the drivers of this demand, accounting for over 55% of global gold jewellery demand and 52% gold investment demand.
India registered a 38% increase in consumer demand in 2010, despite prices surging by over 25% during the year.
Download the full report at the link below :
Gold Investment Advice 2012