Gold is seen as a symbol of security and a sign of prosperity. Indian consumers consider gold jewellery as an investment and are well aware of gold's benefits as a store of value. Gold is also recognized as a form of money in India, a tradable liquid asset.
It is one of the foundation assets for Indian households and a means to accumulate wealth from a long term perspective. Gold investment has been in the culture of Indian tradition and has been on rise amongst the modern investors as well due to the financial uncertainty and inflationary pressures.
Gold as an investment asset has given positive returns for each year during the last decade outpacing most of asset classes. Gold has provided compounded annual return 17.68 % during the decade. Gold ended the decade with a bang and moved up by 29.52 % during the year 2010 making a new high for tenth year in a row.
The risk of sovereign default because of higher debt burden, rising fear of inflation as a result of loose monetary and fiscal policy, uncertainties associated with global growth outlook, thrust for portfolio diversification were few of prime drivers that help gold prices move higher. Situation remains unchanged to a great extent and the concerns that kept gold prices at elevated levels are not yet addressed. The risk of sovereign debt default continues, concerns over rising inflation and weaker outlook for US dollar still remains. Central banks, having huge Foreign exchange reserves like India and China, have only started diversification away from US dollar and they will require huge quantum of gold for further diversification.
All these factors create a constructive environment for higher gold prices.
As per news articles physical demand in India and China remains extremely robust. As per remarks made by the chairman of Shanghai Gold Exchange, China's gold imports jumped 480% y-y to a record of 209.7 tons in the first 10 months of the current year. Mr. Wang Zhe, General Manager of Shanghai Gold Exchange stated that the imports for first 11 months totaled to 247 tons from 60 tons in FY 2009. He further added that government purchase were not behind the surge. The biggest drivers should be jewellery demand, gold bars for investment and the year end gift-giving. Similarly, Gold imports in India, the world's largest gold consumer, has likely reached a record last year driven by investment demand according to World Gold Council. As per market sources total gold imports in India amounted to around
750 tons during 2010 compared to around 557 tons of gold imports in 2009. Gold investment demand in India surges 73 per cent in the year ended Sept, 2010.
Gold is likely to continue to benefit due to lower interest rate regime globally, higher inflation expectation, European debts concerns and thrust for portfolio diversification. The longer term outlook for US dollar remains bearish. On a short run dollar may benefit due to concerns over European debt. But over longer term fundamental weakness in US economy will lead to dollar depreciation and that may benefit gold.
During the uncertain global environment gold tends to benefit due to its safe haven appeal. Volatility in global markets is likely to go up given the current macroeconomic environment and that is supportive of higher gold prices. The typical characteristic of a bubble in any financial markets are nowhere in sight for gold market and hence gold prices are expected to continue to move higher. Geo political uncertainty is the other important demand drivers for gold.
--Source: Bloomberg
