Returns on gold hinge on the rupee rate

Even as uncertainties loom large in the equity and global credit markets, gold may prove to be a safe investment option in the medium term. However, in the short term, all asset classes, including the yellow metal, are subject to the current volatility.

Gold holds potential for an upside. But Indian investors will have to factor in the exchange rate of the rupee, which holds the key to investment in the precious metal.

International gold prices saw a downward correction today on a stronger dollar. The price for August delivery on the LME were around $662 an ounce.

Traditionally, gold moves in inverse direction to the dollar and equities. Of late, short-term movement of gold is more linked to equities. Analysts maintain that investment opportunities exist in gold at a slightly lower level.

"We believe that investors should invest in gold at around the $640 level and can expect a return of 5-10 per cent by the year-end," said Rajini Panicker, head, commodities research, Man Financial Commodities India. She feels gold is still a safe haven for long-term investors. Gold at $640 would translate to Rs 8,400 in the Indian market at the current exchange rate. Gold in the Mumbai market was quoting around Rs 8,700 per 10 gm.

On February 27, international gold prices were $684.5 an ounce, while the 10 gm standard gold in Mumbai quoted around Rs 9,820 at the exchange rate of Rs 44.21 to a dollar.

Yesterday gold in the Mumbai market closed at Rs 8,700, while the yellow metal in London quoted around $660.25, even as the rupee was 40.46 to a dollar. This clearly shows shows that the rupee appreciation has led to a sharper fall in gold the domestic gold prices than those in the global market.

Man Financial's gold price target for the year-end (December 2007) is $700 an ounce. London-based Netixis Commodity said in its latest forecast: "The flow of investment funds is expected to continue to come into commodities, of which gold will be one beneficiary. Any subsequent dip in the gold price should be relatively short-lived as underlying physical demand remains positive." The London-based consultancy firm targets the yellow metal at $675 by the year-end. Another analyst at an international research agency said, "Gold looks bullish and is seen at the $700 an ounce level by December 2007."

Against the backdrop of the strengthening rupee, returns on investment in the yellow metal will be positive if gold moves up internationally and the rupee does not see a sharp appreciation against the dollar from the current level. Analysts underline the fact that Indian gold investors should factor in the exchange rates.

In the recent past, domestic gold prices have dropped despite the bullishness in the international markets, owing to the strong rupee.

Mohan Natarajan, director, Kotak Commodities, has a word of caution for those who want to invest in gold to hedge their risk. "Gold is a hedge, but not a perfect hedge in today's market. Internationally, lots of funds invest in gold and the risk involved is similar to that in equities because of the heightened movement of the funds. Indian interest rates are higher than the global rates and investors looking for options in equities should look at banks' fixed deposits and such other assets."