Gold may regain safe haven status

Gold may regain safe haven status

Mumbai: Indians looking to buy gold for the upcoming wedding season had better hoard up the yellow metal, say analysts.

Gold prices are likely to move up sharply in the near future, they add, as the yellow metal will soon re-emerge as the natural safe haven for global money market investors who are shedding riskier assets.

Gold may touch $800 (Rs32,960) per ounce (oz) by the end of 2007, from a spot market rate of around $667.9 per oz, they say.

Gold used to be a safe haven in times of turmoil, gaining during bear markets or falling markets and declining in asset value during rising markets (or bull markets). During the bear market of the 1970s, gold prices moved up, while the price of other financial assets fell. Conversely, the equities boom of the 1980s and 1990s led to a long decline in the price of gold.

During the bull run in equities over the last four years, however, the distinction between gold and other financial assets and between gold and the US dollar was broken as investors bought gold to reinvest their rising wealth, sometimes from other assets. Investors increasingly treated gold as just another asset class.

The result, said Andrew Holland, managing director of Merrill Lynch & Co. Inc. in India, is that gold was in danger of losing its safe haven status. That was borne out in May 2006, when equity markets tottered around the world. Instead of moving up, the price of gold fell in tandem with equities. In the past few weeks, too, gold prices have reported very little appreciation, though investors have been on a selling spree in equity markets across the world.

But gold traders say that the yellow metal’s status as a safe haven is likely to be re-established. They add that, in the recent sell-off, investors had been buying up US treasury bills, or government debt, which is the safest way to invest in the US economy and currency, resulting an appreciation of the US dollar.

Since gold prices usually move in the opposite direction to the dollar, gold prices have fallen.

However, over the longer term, the risks in the US economy and the size of the US current account deficit are expected to erode the value of the dollar, predict analysts, leading to higher gold prices.

“It is only a matter of time before a lot of money will come home to gold, the safest investment haven without any counter-party risk" said James Turk, founder and chairman of US-based Gold Money, a firm that focuses on trading securitized gold and silver. “Gold prices were on a roll as the dollar weakened against other currencies till mid-July, when there was a change in this trend. Apart from increased dollar demand, central banks, buckling under pressure to bail out equity markets, sold more than 67 tonnes of gold in July, impacting gold prices in both spot and futures markets," Turk added.

Gold Money currently holds more than $200 million worth of securitized gold.

The demand for physical gold is also expected to rise heavily in the next few months, said Manan Y.R. Desai, resident head of the Dubai-based international office of Citigold Corp. Ltd, the Australian gold mining company listed on Australian Securities Exchange (ASX). “Customers in India, the largest market for gold, and those in few other select markets in the West, will drive up physical demand," said Desai, adding that other factors such as oil prices and dollar value will also drive gold prices.

Though India is the largest market for physical gold, investments in gold exchange traded funds have not been very large, said Sandesh Kirkire, chief executive of Kotak Mahindra Asset Management Co. Ltd, the wholly owned subsidiary of Kotak Mahindra Bank Ltd. The mutual fund house owns more than half a tonne of gold under its exchange-traded-fund (ETF) scheme.

“Gold prices were volatile in the past few weeks because of the volatility in the equity markets and more importantly, in the currency markets. As the volatility in the money markets settles down, the price of gold will shoot up," Kirkire added.

Sanjiv Shah, executive director of Benchmark Asset Management Co. Pvt. Ltd, the first Indian mutual fund house to start a gold ETF, said “there is a decent increase in fresh money coming to our gold ETF scheme, in the past few weeks."

Benchmark had started its gold ETF around February 2007 with about one tonne of gold. Today, it holds over 1.4 tonnes of gold. “Most of the new money coming into the gold ETF is from the retail investors and not from institutions," Shah added.

However, the overall flow of money into ETFs has not picked up pace, said Kirkire. This is because ETF as a concept has not really been registered in the minds of Indian investors, he added.

“We think this is the best time for an investor to buy gold," Kirkire said.