Even after revival in equity markets, correction in gold prices will be gradual and limited, say experts

Amid global recession, gold has emerged as the only investment avenue, which not only offers safety, but also gives healthy returns. However, following unprecedented surge in the gold prices, certain sections of the investors have become sceptic about future movement in the yellow metal, as they have bitter experience during the boom time in the commodity markets in 2008, particularly in case of crude oil. Their concern seem to be valid, as experts don't rule out correction in gold, but at the same time they also concede that unlike other commodities, correction in gold will be limited and gradual.

Gold is considered to be the best hedging against inflation and recession. Moreover, returns on other asset class such as equities and realty have almost turned negative in last one year or so. In view of this, investors are making beeline to invest in gold, which has pushed up the prices to the historic level. At this juncture, one should consider the extent of speculative investment in the yellow metal, as such money can be withdrawn at the first sign of the revival in any other asset class. “Equity market is not expected to revive in the short term. Gold, on the other hand, had given very marginal returns in last seven years and therefore the investment demand is on the rise in the gold,” said Mandar Pote, analyst (bullion and metals), Angel Commodities Broking (P) Ltd. According to him, unlike crude, high volatility is not expected in gold and so even after revival in equity market, the correction in prices would be gradual and not drastic.

The physical or consumption demand of gold across the world has gone down and the upsurge in demand is due to increasing investment. Majority of the investment is flowing into exchange-traded funds, gold coins and gold bars. This fact leads to a belief that the investment flow in the gold may have been speculative buying and the investors may back out once the equity or other asset class recovers. However, even during such phenomenon, the subsequent fall in the prices may not take place all of sudden and will occur at a slower pace, say experts citing some reasons.

Renisha Chainani, analyst with Anagram Comtrade Ltd, makes a valid point saying that unlike crude, gold is not only a commodity but a reserve asset too. “Even if liquidity problems are solved in couple of years, gold prices may not fall too drastically as lower prices will generate new physical demand,” says Chainani.

The drastic fall in crude in a very short span is due to the fact that crude is a commodity for consumption and so fall in consumption demand has resulted in drop in prices. Contrary to this, yellow metal is a commodity for investment, rather than consumption, except for India, where consumption demand is higher than investment demand. Secondly, gold demand is dependent only on consumption in the form of jewellery, while crude demand is more broad-based as it depends on overall economic growth. So crude tends to soar when world economy is booming, while gold is best bet during recessionary times.

According to Chainani, current upward trend in gold prices is steady and more importantly not driven by the flow of hot money. “Obviously a much larger share of investment is being diverted into gold. There is no valid reason for all of a sudden outflow, unless a swift and dramatic recovery occurs,” she adds.

Darshan Mankad/ DNA-Daily News & Analysis Source: 3D Syndication