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Gold serves as hedge against rupee depreciation

Gold serves as hedge against rupee depreciation
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First Published: Tue, Dec 23 2008. 10 31 PM IST

Gold prices have see-sawed up and down this year, moving beyond $1,000 (Rs48,500 today) an ounce in March, falling almost to $700 an ounce in October and then bouncing back sharply in December.
Gold has traditionally been a hedge against inflation, so could the fact that inflationary pressures started to abate in the second half of the year have something to do with the fall in the price of gold?
The problem is, if that is the case, why did gold prices go up so sharply in December, with inflation nowhere in sight? The answer lies solely in the US dollar.
The international price of gold is a function of the strength of the dollar. During the early part of the year, when the dollar was weak, gold prices were high. After July, when the dollar reversed course, gold prices started to fall. And in December, when the dollar suddenly took a tumble, gold shone once again.
In other words, it’s purely a currency effect. Because the British pound is so weak now, the price of gold in pounds sterling is now at record highs and is 36% higher than what it was at the beginning of the year. Simply put, gold is a hedge against currency depreciation.
Also see Rupee-Gold Relation (Graphic)
So how has gold fared in rupees? It hasn’t done badly at all. An ounce of gold was Rs32,871 on 1 January and, at the time of writing, was Rs41,529, which would have given you a gain of 26%.
Not bad at all in the current environment, though of course gold in rupees was priced even higher in mid-October. Taking the domestic spot prices for gold, the gain this year would have been 24%—10g of gold cost Rs10,631 on 1 January and was Rs13,171 at the time of writing.
If you had invested in the gold exchange-traded fund Gold Bees, returns would have been 21% for the year.
The outlook for gold for Indian investors in the next year will therefore depend on what happens to the dollar and to the rupee.
Note that gold in rupees did very well during September and October, immediately following the panic that ensued when Leman Brothers collapsed, because the rupee weakened. The chart above shows how the gains in gold this year have been almost exactly equal to the change in the rupee-dollar rate.
Write to us at marktomarket@livemint.com
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First Published: Tue, Dec 23 2008. 10 31 PM IST