Gilt-edged year ahead

Updated: Dec 31 2006, 06:53am hrs
This year will be reckoned for gold touching its historical high in last 25 years. The journey so far has been a remarkable one, and it includes vertical rise in the gold price, and volatility and correction in the second half of the year. The year also witnessed a significant fall from its earlier peak at about $720 an ounce and a recovery during the festival season. But many analysts are now busy predicting gold prices and prospects for the year 2007.

According to Bloomberg survey recently, 13 out of 34 traders advised buying gold. While sharing their views many advocate a weaker dollar, which will help gold. And others opine the development of new instruments helping investors to participate, rising inflationary pressure and new money coming in from the pension funds and central banks.

More than any other factor, weakening of dollar against the major currencies of the world is believed to be the most enthusiastic for better outlook of the gold in the year 2007. The dollar is more than one-and-a-half-year low against the euro. Many analysts anticipate a further slow-down in the US economy, and if simultaneously the Asian currencies rise against the dollar, it will dampen the dollar outlook. It will also encourage trade in other currencies such as euro or yen.

This is evident as recently United Arab Emirates said it will convert some of its US currency reserves into euros. And also, Iran is set to carry out all its oil industry related equipment purchases in euros instead of dollars.

The analysts, besides the global factors, are also looking at the developments after the launch of gold exchange traded funds (ETF) in India. India is the biggest consumer of gold, consuming almost 700 tonne of gold, more than 10% of the world gold demand. Globally, about $8 billion is the AUM of gold ETF. Considering the huge market, launch of gold ETF in India can further boost the gold demand from institutional and individual investors.

While speaking on new trends, Dharmesh Sodha, MD, World Gold Council India, said, The Indian organised retailing and the emergence of gold ETF will be the new trends in the coming year and these will further have impact on demand growth in India.

Gold ETF in India

The days are not far, when one can hold the gold in demat and trade them like shares on the exchanges. Mutual funds have already filed with Sebi for the approval of gold ETF. With the advent gold ETF, the individual investor could invest in gold. And these funds will be listed on the BSE and NSE to facilitate trading.

While making a sense of gold ETF in the context of India, Rajan Mehta, ED, Benchmark Mutual fund (one of the fund applied for the gold ETF in India) believes, "It will help investors in diversifying portfolio, liquidity in selling gold and providing safety by way of holding gold in demat form."

The long-awaited gold ETF will certainly prove to be a good investment avenue and may also add more glitter to gold. Despite so many factors for gold to shine in the New Year, investment gurus still advise to be prepared for volatility. It is a highly volatile commodity and at times wildly fluctuates. Gold as an investment does not yield anything, except appreciation in price.

Many believe the journey has just started. Says, Si Kannan, commodity analyst, Sharekhan, "Gold may not exhibit the same price pattern that we saw last year, yet the structural bull market in gold is well in place." He further adds, "Due to an expected slowdown in the US economy in 2007 and the vulnerability of the greenback against the basket of commodities, the bull market will obviously be more pronounced than ever in the coming year." On the price range, he said that $625-855 an ounce could be the level to watch for in the year 2007.

As portfolio strategy, the yellow metal has always provided some amount of stability. Considering individual risk appetite, some amount of gold is always recommended. Considering global and domestic factors the outlook, if not very favourable, is good for gold in 2007.