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Home > Business > Special

Gold: A great investment opportunity

Dilip Kumar Jha in Mumbai | April 25, 2007

The yellow metal is all set to peak at $720 an ounce, even as consumption is poised to go up moderately.

Will gold touch the psychological barrier of $720? Investment funds are bullish but cautious.

Bargain hunters are still looking for an opportunity, even at the current price level of $690 an ounce, on anticipation of a further rise.

"The target is not far but neither is it easy to achieve," says a trader, arguing that once gold profit booking touches the peak and pushes the metal $15-20 down every day, a repetition of the peak value cannot be avoided.

"Gold would easily touch $720 an ounce this time, after a year-long lag," says Madhusudan Daga, a precious metals analyst.

Following political upheavals in West Asia, gold prices hovered around $700 an ounce in February 2007. Traders had talked of a sure decline in the price after the situation eased. But that did not happen.

Currently, that the high gold price will hold is assured by the fact that there are no issues - like the West Asia turmoil - dogging the precious metal, says Daga. Bullish energy prices also helped gold prices rise as the metal is an investment hedge against oil-led inflation.

"Banks have raised the fixed deposit rate to 11.5 per cent. Therefore, gold money is diverted to the banks," said Prithviraj Kothari, director, Riddhi Siddhi Bullion.

Despite the fact that gold has long been considered an investment option, considering its links with oil, currency and stocks, some analysts believe there's little room to invest for short-term profits, as the metal's price has touched an inflationary peak.

Gold is a refuge in times of economic uncertainty. Given the current price levels, analysts seem torn between the metal's prospects and the anticipated price moderation in days to come.

A rising disposable income for the middle class, particularly in India, and its affinity with gold jewellery, are signs that the metal's demand is rising.

"Gold has missed the growth line of other metals like copper and aluminium, simply because its demand has gone up in developing countries. But with the pace of prosperity in these countries, where gold consumption is in the form of jewellery, it's good news for the metal," said a trader.

Countries, including Russia, have joined the US in looking at gold as a way to hold their national reserves. This results in additional demands for the metal.

But gold supply is likely to remain low for now, due to a fall in production in existing mines and the shortage of permits for new mines.

Indian gold traders have had to experience restraints because of a bullish sentiment due to rupee appreciation. Currently, the gold price of Rs 9,420 per 10 gram is comparable with the international gold price of $650 an ounce (1 ounce = 28.35 gm) a month ago.

The rupee has appreciated about 5 per cent against the dollar in the last one month. And rising gold prices have only brought down the exporter's income.

According to GFMS, a London-based precious metals research major, global gold production is likely to rise moderately by 2 per cent to 2,500 tonnes in 2007, despite the commissioning of new mines, capacity ramp-up in the existing ones and lower production cuts, factors that dampened gold output last year too.

Global gold production posted a substantial 79-tonne decline in 2006, leaving the output at a 10-year low. China recorded a robust 8 per cent increase in year-on-year output, even as the Asian output declined the most, falling by 46 tonnes, compared with relatively modest losses in North America and Africa, where output declined by 26 tonnes and 17 tonnes, respectively.


Boon for banks

The occasion of Akshaya Tritiya brought three cheers for gold sellers. ICICI Bank managed good sales volume of rangolis, torans and kalashes (specialised gold jewellery), while Unit Trust of India picked the day to launch its gold coin retailing business.

HDFC Bank and Kotak Mahindra Bank recorded good gold coin sales on Akshaya Tritiya. The banks, reportedly, were able to achieve their targets.

With a series of incentives, HDFC Bank, with just about a year's experience in gold coin sales, caught customers' attention with its initiatives.

According to HDFC Bank's Executive Vice-President Chitra Pandeya, the bank introduced a new set of coins - weighing 2.5 gm and 20 gm, respectively - for all classes of investors. The bank also added new branches to take the grand total to 500 across the country.

However, the bank is clear that one-gram gold coins do not find favour with it unless the coins are ordered in bulk, as small-denomination coins are not viable because of additional costs, in their making and handling.

HDFC Bank also introduced a credit-card payment system on gold coins, with a 2.5 per cent cash-back offer on HDFC credit card transactions.

Kotak Mahindra Bank reportedly achieved its target by selling 100 kg of gold coins during Akshaya Tritiya. The bank introduced a new range of gold coins, in 5-gm, 8-gm and 20-gm denominations.

These coins were in addition to the 50-gm and 100-gm coins available with the bank from the time Kotak Mahindra got into the business last October.

In order to promote its gold coin sales during Akshaya Tritya, the bank reached out to customers directly over the phone and offered 2-per cent discounts on gold prices across its 105 branches in the country.

The bank has set a target of 700 kg of gold sales for the year, says K V S Manian, group head, Retail Liabilities & Branch Banking.

Spot trade deferred

The Bombay Bullion Association (BBA) deferred the online gold sales it had planned to launch on April 19. Experts feel delivery issues have scuttled the BBA plans for now.

The T+2 delivery-basis system was to be launched on a BBA platform, the first of its kind in India, in technical collaboration with Financial Technologies (India). The exchange was planning to begin spot trading with 1-kg gold.

Despite the delay, a BBA member says the association will help anyone keen on trading in spot gold.

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