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A case for investment in gold
Fri, 26 Dec Pre-Open

Gold has fallen 39% from its peak of US$ 1,923 per ounce which was touched in September 2011. Post the financial crisis in 2008, when the Governments were printing money recklessly, it was the yellow metal that let investors save and increase the value. However, something unexpected and significant happened in the last few months. And it seems to be redefining the investment choices.

What we are referring to here is the decline in the crude prices. Blame it on the supply cut or geopolitical tensions working in the favour of supplies, gold prices have come crashing down. Further, the overall global economic slowdown and weakness in commodity prices has now shifted discussions from inflation to a possible deflation. It was inflation expectations that fuelled the rally in gold in the past. As concerns switch to deflation, should gold be a part of one's portfolio?

Those who are against the argument will go on quoting the rise in dollar and US equities, their inverse relationship with the gold and a possible increase in interest rate by Fed. While these may seem to be reasonable points, what we can not ignore here is that in the major global economies, money printing still goes unabated. Unlike this money that can be limitless and the value of which is likely to be inversely proportional to its supply, gold is a finite asset, and hence likely to be a better store of value.

Another interesting thing to note is that currently, gold prices are close to the cost of producing gold. What this means is that a further decline is likely to make gold production unviable, thus limiting supplies and supporting demand and price. As far as impact of increase in policy interest rate by Fed is concerned, with the current decline in gold price, that seems to have been accounted for. So, at low prices, with limited downside risks and uncertainties abound, we believe that the case for gold to be a part of investors' portfolio remains strong in the long term.

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