Long-term trend bullish, gold may hit Rs 10,000 soon

The time-bound correction in gold prices is expected to be over soon, as prices have already started picking up with fund and speculative trading already lending support to the bullish sentiment.

"The long-term fundamental for gold is bullish despite a recent drastic decline. The prices are expected to go up to $678 (an ounce) this week," Prithviraj Kothari, director of Riddhi Siddhi Bullion and member of Bombay Bullion Association, said.

The yellow metal could touch the Rs 10,000 per 10 gm level in the domestic market any time this week, if the current trend continues, Kothari predicted.

At present, the price of the precious metal in the domestic market is quoting at Rs 9,800 per 10 gm, while that in the international market is being sold at $661 an ounce. With a weaker US dollar and enhanced demand, gold became an effective investment avenue. There is increased consumption of gold by the central banks (China and Russia) as bullion investment.

The Chinese central bank needs to efficiently divert risk from its huge forex exposures to gold from the greenback, Chiragra Chakrabarty of MCX said in his latest report. The current bullion reserves with the Chinese central bank are about 600 tonne (on March 2006). This is slated to more than quadruple to 2,500 tonne-plus soon. The Russian central bank has decided to increase the percentage of its gold reserves to 10 per cent from 5 per cent now. This implies a potential consumption of 500 tonne of gold.

Historically, daily volatility in the gold futures and spot prices is 0.72 per cent and 0.74 per cent respectively (spread of just 2 bps). Maximum intra-day volatility for gold in the last one year is much lower at 5.93 per cent compared with more than 10 per cent in equities of market leaders, Venkat Giridhar of MCX said.

Being a direct hedge, commodity futures contract is the best form of hedging. The correlation between the prices of gold spot and futures is as high as 99.67 per cent, implying a basis risk of 0.33 per cent. This is a clear indication of the benefit hedging in the futures market offers. The correlation between gold futures prices in COMEX and MCX is approximately 99 per cent, which indicates that India as a price taker is watched now globally.

GETF (gold exchange traded fund), which is going to start in India soon, is expected to shift the consumption pattern from spot for saving, but the basic consumption volume of 800 tonne is not going to change. It may be like "600 tonne would be consumed and 200 tonne would be saved by small investors", according to Kothari.

Bhargav Vaidya of B N Vaidya & Associates is also bullish on gold price. "This correction was due for long as the yellow metal was overbought. Intrinsic in nature, gold prices have to decline after a continuous rise. Despite steady sentiment overall, gold prices were driven upwards by rising crude oil and currency prices. The sentiment is sustainable for a longer period," he said.