Gold shines amid global economic turmoil

Gold has assumed the mantle of being the balancing factor against sliding currencies, equities and oil prices

In the prevailing environment of global economic and financial uncertainty, gold is living up to its oft-quoted reputation of being a hedge against inflation and a store of value. In fact, this message rang out loud and in no ambiguous terms last week when the yellow metal clocked a new high amid global mayhem in financial markets emanating from concerns around the euro zone debt crisis and worries surrounding the U.S. economy. Indian gold price, linked directly to international rates, too reached stratospheric levels. During the week international gold scaled a record $1,685 an ounce and Rs.24,330 per 10 gram in the domestic market, closing the week at $1,663 and Rs.24,535.

The possibility of the ‘double dip' recession in the U.S. and the precarious position in some European economies have only reinforced gold's ‘safe haven' status in periods of uncertainty and once again gold seems to be the asset of choice as stock markets tanked not just in India but also reached 14-month lows in Europe as the euro zone debt crisis seems set to impact other European countries.

Suresh Jain, Director, Bombay Bullion Association, felt that gold prices would rule firm in the short-term. “The trigger has been from the U.S. and Europe. There is major speculative activity taking place as also short selling”.

A recent study by Oxford Economics for World Gold Council titled, ‘The impact of inflation and deflation on the case for gold' says, “a significant and commonly observed influence on the short-term price of gold is the level of financial stress which has led to gold sometimes being described as a ‘crisis hedge'”.

It adds that in periods of financial stress, “gold demand may rise for a number of reasons: Steep declines in the value of other assets such as equities and high volatility of asset prices, leading to demand for a more stable store of value uncorrelated with other assets; fears about the security of other assets such as bonds due to the possibility of default, and even fears about cash if the health of the banking system is in question — the fear of a systemic collapse; and the need for liquidity in an environment where it may be difficult to realise the value of other assets”.

Ashok Minawala, former chairman, All India Gems & Jewellery Trade Federation, and Chairman, Danabhai Jewellers, felt that in particular over the last five years, “gold has assumed the role of saviour in times of falling equity markets or economic crises globally. Whenever such situations arise, there is significant gold buying and gold has, in fact, assumed the mantle of being the balancing factor against sliding currencies, equities and oil prices. About two years ago, gold price disconnected from oil and subsequently also the dollar”.

Inflation hedge

The Oxford Economics study adds, “The tendency for gold to hold its real terms value over long periods has often led to gold being described as an ‘ inflation hedge'. However, the reality is more complex as the gold price does not simply move in line with the general price level but rather exhibits long periods where it moves without an apparent link to inflation trends”.

Further, “it is also possible that while gold's real price eventually falls back, this takes place not by a fall in the nominal gold price but by a substantial rise in the general price level, that is that the current price proves an accurate warning of high inflation down the road”.

Mr. Jain felt confident of the efficacy of a long-term exposure to gold. From a technical perspective, he said, “there is a major resistance at $1,740 an ounce level and it is unlikely to cross this in the next quarter. In India, there is an opportunity to buy at declines particularly at around Rs.22,000 per 10 gram levels although at Rs.25,000 level, there would again be a strong resistance”.

Mr. Minawala said gold has been regaining its defacto standard from the position a decade ago when most central banks were selling gold. “Now they are predominantly buyers and want to obviate the uncertainty associated with currency”. 

-The Hindu