As we step into 2011, the key issue on the top of an investor’s mind would be the investment avenue that will provide high returns in an uncertain global economic scenario. Since, uncertainty continues to prevail, looking at bullion as an asset class could be an option. Not only will an individual’s portfolio perform, but it will also be protected from the vagaries of rising inflation. However, at the same time, sharp gains in gold may be capped in the second half of the coming year, as physical demand for the yellow metal may get affected on the back of a sharp rise in prices. Investors could also opt for and look into other investment classes if prices continue to rise.
Currently, the major factors driving gold prices include safe-haven buying during an uncertain economic scenario, inflation hedging and traditional demand. During the year, the euro zone debt crisis has been the main factor that supported the upside in gold.
From a traditional perspective, demand for gold is certain to remain, but the quantum may change. Consider the example of a retail investor who currently prefers investing small quantities in physical gold. The quantum of his investment may decline if gold continues to march towards $1,450 an ounce.
Safe-haven demand will continue as currently the safest investment option in the global financial markets is gold. But we do not expect supernormal gains in the yellow metal, as in the current year itself, it has underperformed against silver. Last year, international gold prices have risen only 27 per cent, but silver has gained a whopping 72 per cent. Hence, gains in gold are expected to be capped to a large extent as silver takes over as the preferred commodity in the precious metals space. But, this does not mean we are bearish on gold as it retains its charm with the ‘head-of-the-family’ status in an investor’s portfolio.
Global central bankers are targeting an increase in gold holdings in their foreign exchange reserves as the value of the dollar is expected to deteriorate in the coming years. With US economic growth slowing down and with no immediate signs of a quick recovery, investment in gold is likely to continue. Over the coming years, if US economic growth remains stagnant, then the status of the dollar as a global reserve currency will come under question, making gold look attractive against a weaker dollar.
On the whole, concerns with regard to the euro zone crisis, rising oil prices and enhanced money supply across the globe will lead investors to flock towards gold as an important asset class. While gains in gold should continue in the next three-six months, the long-term view on gold continues to be bullish, but with a moderation in gains from here on.
The author is associate director, Commodities & Currencies, Angel Broking