Tuesday, May 3, 2011

Is gold a safe haven or a speculative bubble?

  Q: Gold is hitting new life time highs. Are we getting into a bubble zone or do you see a long term uptrend sustaining in gold? What are the key drivers for gold prices?

Rahul : The recent run-up in Gold prices is on account of a few fundamental factors such as :-
Safe Haven Buying: Investors have always flocked to gold as a safe haven in times of uncertainty and crises - bank failures, low and declining interest rates, war, economic crises, etc. Recent events like downgrade in credit rating outlook of the US by S&P, continued political unrest in Middle East & North African countries, financial crisis in various members of the EU such as Spain, Portugal & Greece, and the brimming nuclear crisis in Japan, have all added uncertainty to the global scenario.
Weak Dollar: While the returns of gold are lowly-correlated to global stocks and bonds, it has an inverse relationship with the dollar. With the U.S. dollar plummeting against major global currencies since June 2010 and the Federal Reserve buying $600 billion in U.S. treasuries in its second round of quantitative easing, more individuals are turning to gold and silver to protect themselves from increasing inflation, the continued devaluation of the dollar, and a future which is difficult to predict.
Rising demand: Emerging markets like India and China which form 52% of all Coin and Jewellery demand for Gold. China has also reached a new high of 400MT of annual demand in 2010. Central Bankers turned net buyers of Gold after a period of 21 years. ETFs are another avenue which are gaining currency with the investors adding one more demand factor
We do not expect a reversal in most of these factors in the near term, and are positive on gold as a long term investment.

Q : What are the key concerns / risk factors that investors should keep in mind while investing in gold now?

Rahul : Gold has already seen a huge run-up in the last few years: 2005-35%; 2006-10%; 2007-35%; 2009-31%; 2010-26%. Currently it is trading at all time highs. Part of this rally has happened as a result of Quantitative Easing in developed countries, particularly US and Japan after the Tsunami crisis. This liquidity fuelled rallies may also reverse pretty sharply. So even though the long term trend looks bullish, we still may see some short term cooling off in the pace which in turn would lead to volatility.

Q : Gold was considered a safe haven and an inflation hedge. However, with huge speculative demand building up for precious metals, it is now being considered by some savvy investors as a high-risk, high-return play. Is gold still primarily a hedge or has it acquired a different dimension now?

Rahul : Gold continues to see growing demand in Domestic markets. India saw a 69% YoY surge in Jewellery demand in 2010 despite rising prices. As the income levels grow in India, we are going to see a jump in the aspiration levels and a frantic search for investments avenues. Demographically we are better placed to grow in the years to come which is positive for the Demand. Additionally lesser faith in the paper currency and age-old traditions of buying gold on auspicious occasions are not going to die anytime soon. So despite the run-up in the prices, it remains supported as an asset class due to its demand dynamics.

Q : Do you have plans to introduce a FoF structure to permit SIPs into your gold ETF at some stage?

Rahul : We evaluate various business opportunities including FoFs and may consider it at an appropriate time. 
Rahul Parikh, Head of Business Development, Birla Sun Life AMC
Source : wealthforume

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