Gold prices have gone up by 20 per cent in less than a month and the yellow metal is now trading over Rs 15,000 per 10 gram in the local market. With the steep surge in gold prices, the open interest (OI) in gold futures on Indian comexes has also surged to a record high.
The OI in gold futures on MCX has been just under 22,000 contracts in the current month compared to an OI of 15,000-20,000 in January and 8,000-10,000 in 2008. On some days in February, the OI had even crossed 24,000.
Higher OI with rising prices indicates that the market is bullish on gold and that speculative activity is on the rise.
With the western world and Japan falling into recession and all other asset classes not doing well, investors and hedge funds have found a safe haven in gold. The fall in the value of rupee has also contributed to the rise in gold prices in India.
T Gnansekar, director of risk advisory firm Commtrendz, said: “Investment in gold is happening as hedge against recession and also because of the fear that the government’s stimulus packages would lead to inflation. In both the scenarios, gold is a good hedge.”
What should investors do at this stage? Buy more or book profit?
“Gold is not just an investment. It has store value. When all other asset classes fail to protect returns or capital, gold is traditionally known for protecting values,” said Gnansekar.
Internationally, a huge investment is taking place in gold exchange-traded funds (ETFs). Along with hedge funds, individuals are also buying gold as physical assets. This is also partly responsible for pushing gold prices up.
In the Indian market, individuals have been selling old gold or ornaments to book profit. This is reflected in the dwindling import of gold in recent months. In January, only 20 tonnes of gold is understood to have been imported.
According to data provided by leading bullion research firm GFMS, India imported 862 tonnes of gold in the whole of 2007, followed by 70 tonnes in 2008.
