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A case for the yellow metal

A case for the yellow metal
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First Published: Mon, Apr 27 2009. 12 30 AM IST

Updated: Tue, Apr 28 2009. 08 24 PM IST
Consider this. Gold today is selling above $900/ounce (around Rs45,180). Six years ago, it sold for around $325/ounce. In February, it leapt to over $1,000/ounce. Given the soaring price of the yellow metal, and with recession blues simply refusing to go away, is it a good idea to invest in gold via exchange traded funds (ETFs)? As on 20 April, gold ETFs delivered a one-year return of 12.90% as against the diversified equity fund category return of -34.58%. This despite the fact that equity has been seeing renewed interest from buyers for the past few weeks.
Also See Gold Returns (PDF)
But is it prudent to take the plunge? The allure of gold has never been more tempting as it is in today’s volatile market. However, the more important issue isn’t whether you should consider investing in gold or not. Instead, you need to ask yourself the logic for doing so. Gold has been viewed historically as a safe haven. But this bit of wisdom does not seem to hold ground anymore. Thanks to gold ETFs, the metal is now more of a paper asset whose value is increasingly driven by the demand and supply of paper gold on financial markets.
Consider this: In March, Nasdaq Dubai launched the region’s first Sharia-compliant tradable security backed by gold. Named Dubai Gold, it is the first ETF to list on Nasdaq Dubai. Meanwhile, reports state that in the first six weeks of the year, an increase in demand for gold drove at least 200 tonnes of gold bullion into SPDR Gold Shares, the world’s largest gold-backed ETF representing around 1,000 tonnes of gold.
Gold ETFs have driven up investment demand because of the ease with which you can invest in them. As a result, it is now clearly subject to the same volatility that affects other financial assets as investor interest flows in or out. Moreover, gold certainly did not appear to be a great hedge against falling stock prices. When the global financial panic was at its peak in October, gold prices were at their recent low. International gold prices peaked in March 2008 and from then on till the end of October, gold fell by about 25%.
Gold is no longer physical wealth but a paper asset whose value can fluctuate widely. No doubt it has value as a hedge against the dollar and is a great option in a worldwide monetary collapse. Still, a number of analysts feel that its price is currently overvalued. We could well be in a gold bubble which is just as ephemeral as the stock or oil or real estate bubbles were. Waking up to gold could be like waking up to stocks or real estate in 2007.
But for every cautious or cynical observer, there are plenty of optimists making predictions of the highs that gold could reach. US-based Swiss America Trading Corporation (SATC) published an article in March which listed 70 economists who, on an average, predict that gold is poised for a dramatic surge and could touch $2,000/ounce. Their argument: Gold is a good hedge against anticipated inflation and is globally liquid, which is of paramount importance with the debasing of currencies in developed economies.
Write to us at businessoflife@livemint.com
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First Published: Mon, Apr 27 2009. 12 30 AM IST