Shining ever brighter

MONEY MAKERS 2006: GOLD

Despite the fact that gold prices recently touched a 25-year high, analysts continue to be bullish on the yellow metal going forward.

Gold prices recently hit a 25-year high on the back of its biggest ever rally in 2005. Now, under normal circumstances that may be cause for worry. The good news is that analysts are still bullish on gold prices.

From $260 three years back, gold prices have shot up by over 100 per cent now and 16.1 per cent in a year. At about $504 an ounce or Rs 7425 per 10 gram, one question which is hogging every retail investor's mind aiming to buy gold is whether it is the right time to buy gold or can it give the kind of return it has given in the past.

Analysts say investors need not fret at all by looking at these levels and they can still expect a level of around $650 an ounce in next two years. But expect some correction of $15-20 in the short term (level of $480-490).

Buy on dips

Commodity analyst of Share Khan, Si Kannan's message to the retail investors is "Buy the yellow metal at every dip because its not too late to buy gold even at these levels because gold at the current levels of $500 an ounce is still undervalued due to the discount of about 20 per cent to $620- a 200 year average gold price.

Sunil Ramrakhiani, head of commodities of IL&FS Investsmart Commodity Brokers Ltd. is also bullish on gold and expects a level of $650 in next two years. However, he cautions that the only thing which can go against investor interest is the appreciation of rupee against the dollar.

He feels that rupee is expected to appreciate by three per cent in next six months. This is because India is expected to witness continued FDI flows which is more stable. However, even then the net gains would be much higher as compared to earlier years.

The shining metal

Gold rally started in 1999-2000 and since then the uptrend in the prices has continued. For three consecutive years starting from 2002, gold prices have appreciated by 24 per cent, 21 per cent and 16 per cent respectively.

Gold prices recently touched its 25-year high of $540 an ounce in December 2005. Analysts opine that since gold is traditionally held as a hedge against inflation, high crude oil and energy prices have led to the rally.

For example, Japan holds a lot of gold as a hedge against inflation. The rally between $480-$540 has been without correction points out Kannan of Share Khan. He adds that the Japanese have bought lot of gold due to uncertainty over the Japanese elections held in September 2005 and the outcome of the reform process. There was also uncertainty over macro factors in OECD countries like EU, Japan, US etc.

The alternative investment

In an ideal situation gold prices fall when the dollar appreciates and interest rates rise because world over gold is an alternative investment asset class. Thus, when the dollar loses value, gold gains in value.

However, the scenario has been quite different this time around. The bullish sentiment in gold prevails despite the appreciation of dollar against the rupee and other currencies not to speak of the continuous rise in US interest rates.

Rajesh Mehta, chairman of Rajesh Exports, which is one of the leading players in jewellery, points out that this only signifies that inflationary concerns still prevail in the developed countries, despite rising interest rates.

Says Prithviraj Kothari, director of Ridhi Sidhi Bullion and member of Mumbai Bullion Association, "Global investors were buying gold heavily due to the weakness in their economy."

He also adds that hedge funds have been long on gold since 2001 and have been adding 150 tonnes every year. Also demand is exceeding supply the world over as mining output has not kept pace with demand. This has been fundamentally supporting the gold prices.

Ramrakhiani of IL& FS Investsmart feels that commodity and hedge fund managers and speculators have played an important role in the uptrend in gold prices.

Since the dollar was depreciating many economies mainly Asian countries holding huge amount of dollars in their treasuries started diverting their reserves to gold. Middle East countries rich in availability of crude oil (which currently ruling high) are also demanding more gold due to the huge pile of cash.

Says Mehta of Rajesh Exports, "There has been shift of investments from intangible assets like shares, bonds etc. to tangible assets like gold in last one and half months."

Developed countries like EU, US and Japan have started feeling the need of inclusion of gold as an asset class in their portfolio. Also, central banks of several countries including South Africa and Russia recently said that they would not like to sell gold, but in fact they would like to increase their gold reserves.

Analysts feel that the recent appreciation of the dollar due to rising of interest rates is unlikely to continue after some time as the frequency of the hike in US interest rates may slow down. This is expected to support gold prices.

Mehta says there is still room for one more correction in next few days. However, till the advent of the new year, nothing major can be expected and gold can be expected to remain range bound between $495-505 levels as the bullion markets remain closed. However in the beginning of the new year, one correction is expected with gold prices expected to slide to $480. He advises investors to cash in on the expected correction and buy gold.

Overall analysts are bullish on the yellow metal. Kothari expects gold to touch $580-620 an ounce and advises to enter at the levels of $480 an ounce.

Ways of investing

Jewellery: There are various ways of investing in gold. Gold in the form of jewellery has been the traditional way of investing in gold and has been the biggest consumer of gold contributing to about 80-85 per cent of total demand.

Bars and coins: Naveen Kumar, head of financial initiative of World Gold Council recommends bars and coins because it can be easily bought and sold and there are no labour and making charges like gold in the form of jewellery. ICICI Bank has been dealing in gold coins since the past three years.

Earlier, they used to provide only 10 gms, but now you can buy them in smaller quantities like 2 gms, 5 gms and 8 gms. Even HDFC Bank has started this service in August 2005 but right now it is restricted to only 5 gms. The bank is likely to provide in 8 gms, 20 gms and 50 gms in 2006. New entrants in the segment include IndusInd Bank, Indian Overseas Bank and Corporation Bank.

Gold shares: World Gold Council in association with Multi Commodity Exchange (MCX) started a service in July last year called

"IGold" where an investor has an option of holding gold in the demat form instead of physical delivery. This can be done through a commodity broker with some charges like custodial and insurance apart from brokerage. NSDL (National Securities Depositories Limited) is the depository participant and Group Four Securities is the custodian.

Gold futures: Ramrakhiani of IL&FS Investsmart suggests that the best and cheapest way of investing in gold is through gold futures contracts as it has the lowest impact costs as compared to bars and coins available through local banks.

There are two types of contacts namely 1 kg contract and 100 gram contract and the delivery is every alternate month. For example the settlement for gold futures is in even months like February, April and so on.

The initial margin charged by brokers is 3.5 per cent on the contract value and from thereon it is marked to market (i.e. the amount is credited or debited on closing price of each day until settled). Alternatively brokers also charge 5 per cent margin as lump sum which includes initial margin and also marked to market amount.

Exchange traded funds: There are certain new methods likely to be introduced in India available to retail investors. Sebi has recently given the green signal for exchange traded gold funds.

Further, Gold accumulation plan is also likely to be made available in India by RBI. Gold accumulation plans are similar to systematic investment plans (SIPs) provided by mutual funds wherein retail investors are allowed to make a limited investment in gold every month. In India this facility is provided by jewellers on an informal basis.