Gold vaults past high of $600

Spot gold passed another milestone on Tuesday when it touched Rs 8,700 per 10 gm on the Mumbai bullion market, as the yellow metal scaled past a new 25-year high of $600 an ounce overseas.

The spot gold price touched a new benchmark at $602.70 in the European and Far Eastern markets on Tuesday. The most attractive investment option in precious grade metal is gaining ground following huge transfer of oil funds and weakness in dollar. The latest spurt has been attributed to fresh geopolitical concerns and growing evidence that institutional investors are taking big bets on gold among other commodities.

Silver, too, is gaining momentum following the launch of exchange traded funds (ETF) in the European market. "Attraction towards gold would automatically be checked," said Bhargav Vaidya of Vaidya & Associates.

One of the most important driving force behind the bullion surge is also the launch of ETFs, for both silver and gold, by the World Gold Council (WGC) in the US, the UK, South Africa and Australia markets. These ETFs provide an efficient, low-cost and highly tradable option for investors who are bullish on the metals. In fact, ETFs have been successful in attracting gold investors substantially.

Concerned with crude oil supply disruptions from Iraq and Nigeria which pushed up oil prices by $2 to $69 a barrel, a trader said that the gold prices would continue breaking records unless other investment options come to fore. Gold, being an international commodity, would continue moving in line with the movement in the international market, a local trader said.

Even though Saudi officials reckon $15 of the oil price is due to "speculative interest," it may soon test the all-time high of just over $70. Speculative interests have always helped buoy gold prices too. This time too, the spurt in gold price is not entirely due to inflationary fears, he added.

Going by the historical data, gold is underpriced 15.4 times in comparison with crude, which means the price of gold has to touch $1,050 per ounce if crude price touches $70 a barrel. While annual supply of newly mined gold has been constant around 2,500 tonnes for a few years, demand led by Asia, has been growing strongly.

According to an estimate by the WGC, these new funds now own nearly 600 tonne of bullion. The demand by ETFs last year outstripped gold sales from central banks. These sales, since capped by an agreement among the banks, were the main reason for the metal's poor performance during most of the 1980s and 1990s, an expert said.

Apart from being an investment option, gold continues to enjoy strong demand from consumers in rapidly developing economies, especially India, China and the Middle East. This year so far, the gold price surged by 17 per cent, and shows little sign of a slow down. A trader anticipated the price in the international market might touch $700 per ounce in the next few months.