Gold prices shine on inflation outlook

Gold prices shine on inflation outlook

Fund manager surveys and strategy reports talk alike about risk appetite returning to investors and developed market equities being the play of the day. However, after a pause in January, gold prices have been quietly inching up, before jumping to a record of $1,434.90 (Rs64,714) an ounce (28.35 gram) on Tuesday.

It is not hard to see why. As tensions grow in more Middle Eastern countries such as Oman and Libya, following successful revolts in Tunisia and Egypt, the spectre of inflation arising out a possible oil shock is never far from investors’ minds. Notwithstanding Saudi assurances on supporting supply, crude prices are showing no signs of easing. Brent crude is again trading near $116 per barrel, after falling to $110 last week.

No wonder, investors are buying gold to hedge against rising prices. To give one example, gold rose 30% in 2010—when the inflation problem started—against a 17.4% rise in the Sensex. That also partially explains the multi-decade high of $34.74 an ounce reached by silver, which benefits from the spillover demand from gold.

Not only that, inflationary expectations are rising across the world as developed countries emerge out of recession. In February, the US and the Eurozone recorded their fastest post-crisis expansion in manufacturing. February purchasing manager indices data across the world showed factory input costs rose significantly over a year ago.

On Tuesday, US Federal Reserve chairman Ben Bernanke talked about a “relatively modest increase in US consumer price inflation". On the same day, the European Commission hiked its inflation forecast for the area to 2.2% this year against a previous 1.8% estimate.

And that’s just gold’s demand as a safe haven against inflation. Despite a 30% increase in gold prices in 2010, Indians bought 963 tonnes of gold, about two-thirds more than the year ago, according to the World Gold Council. The growth in China, another country to suffer high inflation, was even more. The industry lobby expects the two highest consumers of the metal to demand more this year.

That perhaps explains why although prices subsequently cooled down a bit on Wednesday, the overwhelming consensus seems to be further firming up of prices this year.

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