Golds glitter remains despite spiralling prices

Written by fe Bureau | New Delhi | Updated: Jul 28 2010, 14:22pm hrs
Gold continued to be one of the most sought after commodity in the world despite prices spiraling by almost 11% in dollar terms and 23.1% in euro terms during the second quarter of 2010 calendar year that started in January, the World Gold Council's (WGC) second quarterly investment report released on Tuesday showed.

Between April-June 2010, gold investments in exchange traded funds (ETF)'s zoomed to 273.8 tonne, the second largest quarterly inflow in record. In Indiathe world's largest consumer of the yellow metaldemand skyrocketed by a whopping 291% to 147.5 tonne, helped partly by a strong rupee, which made imports cheaper.

Interestingly, the WGC report states that though gold reached record highs during the second quarter of 2010, its price relative to other asset class does not appear to be overvalued by historical standards. "Price of gold relative to the MSCI US equity index shows that gold remains below level seen in the late 1980's," the WGC report showed.

It said that the commodity is less valued relative to international equities as measured by the MSCI World ex US index, the S&P Goldman Sachs Commodity Index or even the Barclays Capital US Treasury Aggregate.

Experts said that WGC report indicates that though gold topped $1,250 per troy ounce this quarter and reached record highs in dollar terms, the metals has still some steam left before it pauses.

On the terms of volatility too, the WGC report said that in general, annualised gold volatility in May and June remained around 18%, above its historical mean (gold's 20-year price volatility is around 15.8%).

However, the rise in gold's price volatility has been dwarfed by comparison to the VIX indexa market estimate of future volatility based on the weighted average of the implied volatility of a wide range of option strikeswhich traded at an average of 26.4% in second quarter of 2010, up from 20.1% in the previous quarter.

Similarly, the average daily volatility on the S&P Goldman Sachs Commodity Index rose to 23.4% in second quarter of 2010, from 21.3% in the previous quarter on an annual basis, the WGC report showed. Gold remained, on average, one of the least volatile of the commodities that we monitor, with the exception of the S&P GS Livestock Spot Index, the WGC report showed.

On India, the WGC report said India maintained its position as the strongest performing market globally where demand rocketed by 291% to 147.5 tonne, although relative to a very low base of just 37.7 tonne in Q1 2009. The report noted that a firm Indian rupee also helped in keeping demand robust as it made imports cheaper. Going forward the WGC report expressed hope that gold's appeal as a strong investment alternative will continue to grow as shown in the second quarter of 2010 because of investor's interest in asset diversification, protection against downside rise, wealth preservation and liquidity.