As the greenback loses its sheen, gold’s gleam is shining bright

Countries look to park their funds in the yellow metal due to a falling US dollar and diminishing yields from government securities

The month of December 2009 is expected to be very exciting for gold lovers, bullion dealers, speculators and central banks as the International Monetary Fund (IMF) is set to sell an additional 190 tonnes of gold. India is seen as the leading suitor while smaller countries are expected to jump into the gold-buying fray.

Early last month, the RBI bought 200 tonnes of gold from the IMF for over $6.70 billion.

After India’s big purchase, Sri Lanka announced that the country had bought 10 tonnes of IMF gold for about $375 million while Mauritius purchased 2 tonnes for $71.70 million. This created speculation that almost every country is keen to increase reserves by buying the yellow metal on the back of a declining US dollar.

Speaking on the RBI’s purchase of gold, J Moses Harding, head of global markets group, IndusInd Bank, said that the purpose of the central bank’s investment in gold may have been to re-balance its investment portfolio for better returns.

Mr Harding also said that it does not make sense to hold most investments in low-yielding bonds (issued by the US or other developed countries) and as a strategy, RBI should look at spreading its investment portfolio across different asset classes and across currencies.

Since gold prices are already up by 15%-20% since the RBI’s purchase of gold, it is not sure whether the rally in gold would sustain over the longer term—beyond three-five years—and investments at the current level should be
short term in nature, he added.

The global markets expect gold prices to cross $1,200 per ounce since prices began rising from the September 2009 low of $992 per ounce. Speculations that central banks would purchase more gold to hedge against the falling US currency and fears about inflation in the year 2010 have driven prices upwards.

According to Mr Harding, the weak dollar and low interest rate regimes in developed economies will keep the bull phase of gold intact for an extended period of time. But it is very difficult to set a target as gold is trading at levels not seen before (after a sharp fall from $1,030 to $680 per ounce since March-October 2008), registering a 75% rally since October 2008, he said.

Mr Harding also feels that the yellow metal is now in safe haven due to weak (and uncertain) equity markets across the globe and low yields on bonds. Also, the performance of the real-estate market is under a cloud as a quick global economic turnaround is not expected, he added.

History indicates that gold prices have always been riding on the movement of the US dollar. Hence, investors need to be very cautious when it comes to investment in gold from here on, as gold prices are being clearly driven by the depreciating US dollar. If the greenback shows strong signs of appreciation in the future, a correction in gold prices is probably likely.

Despite the fact that gold prices have made new highs globally, the demand in India still remains suppressed.

According to provisional data released by the Bombay Bullion Association (BBA), India’s gold imports have declined to around 18 tonnes for November 2009, compared to the 34 tonnes the country had imported the same month last year. In October 2009, the country had imported 48 tonnes of gold, a rise of 45% compared to 33 tonnes in the corresponding period last year due to sharp rise in jewellery demand and a pick-up in investment.

In November 2009, Minerals & Metals Trading Corporation (MMTC) had picked up 15.13 tonnes from the global market as against 10.42 tonnes in the same period in 2008-2009. In the first ten months of 2009, gold imports were 156.9 tonnes, down 59% from 383 tonnes in the same period in 2008, as per BBA data. Again, gold imports till November this fiscal remained low at around 400 tonnes, compared with 635 tonnes in the same period last year.
-Swapnil Suvarna [email protected]

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    Gold likely to average $1,300/oz by Q4-2010, says StanChart

    The investment case for gold has become increasingly compelling with central bank buying and a structural change in interest in gold as an investment product among retail customers, said Standard Chartered (StanChart) in a research note.
    “Although the upside will be capped by lower jewellery demand, increased availability of scrap gold as prices surge to new highs and periodic dollar strength in the first half of 2010, we see gold moving higher to average $1,300 per ounce (oz) in the fourth quarter (Q4) of 2010 once the dollar resumes its weakening trend,” said Helen Henton, global head of commodity research StanChart.
    Gold has averaged $955 per oz so far this year.

    In its Commodities Quarterly report, StanChart has said that it expects platinum to outperform gold in 2010, supported by the upward momentum provided by gold prices and due to supply issues, including rising costs and a vulnerable power grid in South Africa.

    After plummeting in Q4-2008, commodity prices have performed well this year. The Dow Jones UBS index is up 15% so far this year, led by a 64% lift in industrial metals prices. Crude oil prices are also up 74%, but the energy complex as a whole is down this year as natural gas prices have been weighed down by massive oversupply. Precious metals have also risen 37% year-to-date, the research note said.

    The gains have been driven by a combination of US dollar weakness, supply restraint, improving investor sentiment and, eventually, a pickup in actual demand. Crude oil demand, for instance, bottomed in the second quarter and is now edging higher.

    The levels of demand are still below previous peaks, however, StanChart said it does not expect crude oil demand to return to the previous peak in Q4-2008 before 2012. The weak demand growth and the potential among the leading producers to expand output are likely to keep crude prices capped, with average price for Q4 of 2010 forecast at $88 per barrel, it added.

    Crude oil has averaged $60 a barrel so far this year.

    Among base metals, StanChart said it is relatively more bullish on copper and lead where the supply situation is tighter. The outperformance of the base metals complex this year is a direct result of China’s stimulus package and early recovery. While the level of imports may have been excessive and inventories have risen, the recovery in end use demand has been evident in the key metal consuming sectors, it added.

    According to the report, commodity prices will retreat in the first half of 2010 as the dollar rebounds and concerns emerge over the sustainability of the global recovery. It said during this period investors are likely to refocus on commodity market fundamentals—those with the tightest supply are likely to outperform. With liquidity still ample, the pull back is unlikely to be severe.

    The second half of 2010 is likely to be markedly different from the first half as renewed US dollar weakness, pickup in growth in the US, in particular, and ample liquidity draw investor funds back to commodities, pushing prices higher, the report added.

    With the notable exception of nickel, soya beans, sugar and rice, prices will rise in the Q4 of 2010 versus the corresponding period in 2009, StanChart said.

    Among agricultural commodities, which have underperformed other commodities this year, corn is expected to lead prices higher in 2010 as a result of poor weather conditions in the US and China. Corn and palm oil are also likely to benefit from firmer energy prices in the second half of next year. In contrast, the winning agricultural commodities of 2009—sugar and soya beans—are likely to underperform as improved crops flood the market, dampening prices, the StanChart research report said.
    -Yogesh Sapkale [email protected]

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    Iron ore prices set to go up

    Strong Chinese import demand overcomes fears of global steel oversupply

    Iron ore prices have begun soaring since September 2009 from a bottom of $80-$84 per tonne and are now nearing their recent peak of $110-$112 per tonne of early August 2009. The cash prices for Indian iron ore exported to China have been hovering above $100 per metric tonne on higher freight costs, increased Chinese demand and disruption in Indian supply.

    Even the China International Capital Corporation (CICC) comments that steel demand in China may consume 12% of iron ore next year thanks to booming property and auto demand. CICC expects China’s domestic crude steel consumption to increase to 606 million metric tonnes in 2010. India-China freight charges have shot up to $24 per tonne from about $16 per tonne. 
    In India, the Orissa government has ordered to halt work in 50 mines because they did not have proper documentation and did not meet environmental norms. This has severely affected Indian supply. If the Indian bottleneck continues, iron ore prices are expected to hit higher levels. As per market sources, the cash price for Indian iron ore exported to China is expected to rise by about 4% by the end of November 2009.
    In the first 10 months of 2009, total iron imports by China rose 37% from a year earlier despite a lull in October 2009. According to China customs data, year to end-October 2009 iron ore imports were 514.8 million tonnes (MT), compared to 469.3MT between January 2009 and September 2009. China’s iron ore imports fell by almost 30% in October 2009 from September 2009. It imported 45.5MT of iron ore in October 2009, 19MT less than the record 64.5MT imported in September 2009. Meanwhile, imported iron ore inventory at China’s major ports fell to 65.74MT as of 16 November 2009 from 66.96MT as of 9 November 2009, indicating strong demand.
    But the major concern has been the steel oversupply scenario. China Iron and Steel Association (CISA) has warned that oversupply in the Chinese steel sector could worsen in the fourth quarter and in early 2010. China’s crude steel output was 420.40MT, up 7.5% year-on-year in the first nine months of this year. In October 2009 alone, Chinese crude steel production growth has sharply grown by 42% year-on-year to 51.75MT.
    Meanwhile, the entire year’s output is estimated at 550MT, up 50MT or 10% from 2008. China’s apparent steel demand rose 20% year-on-year in the first nine months, to 421.80MT, mainly driven by the government’s expansion of fixed asset investment, and the growth is predicted to sustain into the fourth quarter and early next year. Surprisingly, in October 2009, the investment in China’s fixed assets and real estate has been below expectations. Investments increased by 33.2% in the first 10 months, but were down by 13.2% monthly, which is the largest monthly reduction over the past decade.
    Swapnil Suvarna [email protected]
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