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]