Gold

The price of gold has been rising like never before. It is at historically the highest levels currently. Actually it is very interesting to see the reasons for the steep prices. The prices seem to betray the common logic of demand and supply. One of the many factors contributing to the high prices of gold is the rising demand for crude oil and the consequent high prices for the crude. The high crude oil prices have caused inflationary pressures in many oil dependent economies and also in currencies worldwide, especially the dollar.

Traditionally, currencies and gold have been on the two pans of the investment balance. When currencies fall or weaken, the money is pumped into gold because next to the currency, it’s the gold that is tangible and liquid. Rising inflation has caused depreciation in the dollar, and so, many investors have parked their money in gold, instead of T-bills and the US bonds.

The investment issue has two angles to it - the large private equity and hedge funds and the institutional investors on the one hand and the general public on the other. The general public has been helped in their quest to invest in gold by the emergence of two major Exchange Traded Funds (ETFs), the StreetTrack and the Comex, which deal in gold investments. As a result, the layman also is able to put money into gold even without possessing the equivalent quantity of gold in physical terms. As far as the hedge funds and private equity players are concerned, they have pumped in monies in the whole commodities market. The phenomenal demand for steel, aluminum and copper in China’s construction sector has led the price rally in the commodities market. Now, the hedge funds, funds of funds and the private equity players have included the gold also in this commodities bracket. This has resulted in an artificial demand for the yellow metal. But no private equity player or hedge fund is ready to accept that. According to them it’s those who are in the dark forest between the private equity and the hedging business who are responsible.

Another important factor to be noted is the fact that the prices of gold have been rising in spite of low demand in India, which consumes 70% of the gold. No Indian in sane mind is buying gold at the retail level at such high prices.

The rising fiscal deficit in the US economy vis-à-vis the burgeoning China’s exports to the US have led to the fall in the dollar value. As a result, the pressure on the Chinese to revalue the renminbi (Yuan) is also increasing. As and when that happens, not only will the US breathe easy, but it is quite likely that worldwide commodities’ prices may come down. But, as is widely believed that the days of $30 per barrel of crude is over, the gold prices are also on a very tricky and volatile ground. Like the proverbial cat on the wall – you never know which way it will jump!!