The Hindu Business Line : The lure of gold

There is so much of outdated information about gold’s attractiveness as an asset class that is made to float around these days, there is real danger gullible investors may fall prey. Whether one likes it or not, the yellow metal has been facing downside risk for sometime.

This is notwithstanding operation of factors like the weakening US dollar that support an upside move. Yet, despite a considerable fall in the value of the greenback vis-À-vis the euro in recent weeks, the yellow metal has failed to decisively break the $950 an ounce barrier. If anything, prices have been range bound over several sessions during April and in the first two weeks of this month, hovering around $900/oz.

The real fact is that with the stock market showing clear signs of revival the safe haven status of gold is under challenge. In addition, several other commodities have outperformed gold in terms of price. No wonder, investor interest in the yellow metal is beginning to wane. This has been in clear evidence since April this year.

However, in its latest report, the World Gold Council (WGC) has asserted that global demand for gold increased 38 per cent to 1,016 tonnes between January and March this year mainly due to large-scale buying by exchange-traded funds (ETFs).

While this number for the first quarter cannot be disputed, the correct picture is that there has been an alarming slowdown in inflows into exchange traded products during April and the first half of May, clearly pointing to waning investor interest in the precious metal. The WGC conveniently failed to disclose the latest as far as ETFs inflows are concerned.

A pick up in the equities market has dampened fresh flows into the physically-backed exchange traded products. After record inflows of 220 tonnes in February, the next two months witnessed a slowdown in such inflows. For instance, inflows were up a mere 5 tonnes in May, compared with 53 tonnes during the first seven trading days of February.

Whats the latest correct position? After trading mostly in a range bound manner during the whole of April at $870-920/oz and early May, prices have slowly begun to gain traction in the last few days primarily because of the return of some positive investor sentiment supported by weakening of the US dollar. Gold prices are now at $940/oz.

Look at the market fundamentals. For 2009, total physical supplies are estimated at 3,660 tonnes and total fabrication demand is at 2,598 tonnes,

disclosing an implied physical balance of 1,062 tonnes, the highest since the year 2003. At the current level of prices, while scrap sales are rising, physical demand in price-conscious markets such as India is facing destruction.

During January-March 2009, gold demand in India declined by a whopping 83 per cent to a mere 17.7 tonnes as compared with a year ago. Price elasticity of demand is clearly at play.

According to experts, ETP flows have been rising and would continue to rise in 2009; but on current reckoning, there is nothing to suggest that global investors continue to bet big on gold.

While investor interest towards gold is positive, it must be remembered that investors are a cautious lot. They are smart enough to evaluate the risk factors that may not be fully disclosed by some stakeholders. Stated simply,

investor demand is fickle and can change anytime. Also, they have no specific loyalty to any particular commodity. Funds seamlessly flow from one commodity to another or one market to another in search of returns.

Another case of hype and spread of partial truth about gold relates to sales figure on the day of Akshaya Trithiya in April.

The fact is that sales in India were down eight per cent in physical terms despite massive marketing campaigns and publicity blitzkrieg.

But it was touted as if there was a huge surge in sales by quoting the value figure. Clearly gold prices have risen in the last one year to unaffordable levels and physical sales actually suffered.

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