All that glitters is Gold

Gold has proved its mettle by outperforming the both the stock indices and the commodity space through the financial sector crisis in 2008 and it is believed that it will continue to perform well through the economic downturn whose depth is still a matter of speculation only. Gold held its fort in 2008, gaining around 6% versus a loss of 62% for oil, 38% for Aluminum and 57% for Copper. In terms of its performance against the indices, Sensex lost about 50%, while Dow Jones lost 34% and S&P 500 lost 39%.
Going forward volatility is expected to continue and a price range of $ 650 to $ 1000 cannot be ruled out. Analysts have, however, capped the top around $ 1050 only with the average prices for the year to range from $720 to $925. However, the LBMA (London Bullion Market Association) panel's estimates for 2009 are for a gold price high of $1,074, a low of $721 and an average of $881. Opinions thus indicate a volatility range of about $ 300 for 2009.

Key factors to watch out for

• Inflation & USD: Inflation expectations of bail out packages to be announced by the Obama Govt. in US, the EU’s plans to tackle their financial woes coupled with currency movements of US dollar are expected to influence the gold prices significantly
• Oil Prices: Obama’s anti-terror policy against the Islamic world which is a major supplier of oil to the world and his handling of the strong anti-Palestine sentiment of the Israel would be a determinant in escalating/diffusing the world political crisis and has an attendant impact on the gold prices, going forward.
• Capital Market Performance: If equity markets start recovering on positive developments of economic revival, fresh investment flows in gold may take a back seat and the “safe haven” effect may get diluted to that extent as risk appetite would increase.

Demand Supply Equation
The demand side pressures and physical supplies constraints may continue to support the gold prices in the initial period of 2009.
On the Demand Side
• HNIs and retail investors alike have continued to show investment appetite in gold bars in recent months as a safety against mounting economic worries which will sustain the gold prices in the near future. Besides demand from Institutional Investors through the ETF route is also expected to weigh on metal supplies.
On the Supply Side
• South Africa, a major producer, has already been relegated to the third place behind China and US in mine production during 2008 with the South African output dropping by 14%.
• Supply from the Central Banks of certain European nations, who have been regularly offloading gold, has come down by as much as 42% in 2008 and the trend is expected to continue in 2009 also which would restrict the supply even as mine production is coming down every year.

Future still looks bright
• Analysts expect Gold to continue to outperform the equity markets and other commodities in the first half of 2009 as Investors would be wary of any rally in the equity market backed by the support from the governments. In fact, profit booking by safety-seeking investors may put the brakes on any long range equity rally in the first half of 2009.
• According to Gold Fields Mineral Resources, an internationally reputed research agency on gold, gold is expected to gain 23% to achieve a high of $ 1000 once again in the first half of 2009.
• According to Global Forex trading, a reputed forex research agency, the US dollar should weaken in the first half of 2009 and recover in the second half. Gold gains as dollar falls.
• Considering an expected price of $1050 for the gold, and for a maximum exchange rate for USD/INR of Rs 50, the landed price of gold in India may touch Rs 17120.