Wednesday, October 21, 2009


Gold, a symbol of wealth, has been traditionally considered as a hedge against inflation, mostly moving in tandem with rising inflation and inversely with the dollar. Gold bullion has been maintaining an upward trend with a phenomenal CAGR of more than 15 percent since 2001. It has gained for eight consecutive years as the decline in the dollar and increasing financial volatility boosted demand for the yellow metal.

The precious metal continued to glitter in the year 2009 with more than 18 percent surge in gold prices till-date. Dollar weakness and seasonal buying spurred up the demand for this yellow metal and resulting in, the bullion settled the quarter with 8.8 percent jump in the prices. This was the highest since the three month ended March 31, 2008. The dollar index, a measure of greenback against the world’s six-major, remained the driving force for gold prices. The gauge dropped 3.74 percent during this quarter, completing 7.24 percent decline till-September in the year 2009.

In regard to investment demand, assets held by exchange-traded funds backed by gold bullion jumped 55 percent in 2009 as the financial turmoil and inflation concerns boosted the metal’s appeal as an alternative investment. Holdings at the SPDR gold ETF have increased by 41 percent this year and climbed to a record-high in June.

Moreover, prices have shot up sharply in the last couple of months because key producers have been implementing a major de-hedging exercise. De-hedging involves a company buying back such “hedged” gold in expectation of price rises. With Barrick Gold Corp, the world’s largest gold producer, at the forefront of the move, the indication is that producers are accelerating the process of buying back hedges to get full exposure to the metal, in anticipation that prices will rise further.

On 7th Oct 2009, gold prices made a record high of $1,049 levels during intra-day sessions.

On Sep 23, dollar index fell to 75.89 levels, close to one-year low.

The recently concluded G-20 Nations Summit acknowledged the recovery remains dependent on emergency government measures. The group of 20 will also avoid any premature withdrawals of stimulus which will further encourage investors to take on more risk. The G-20 leaders also paved the way to overhaul the banking industry. Going forward, the broader G-20 will supplant the Group of 8, a club of the most highly developed nations plus Russia.

The recent FOMC meet has concluded with keeping its benchmark interest rate intact at 0.25 percent.

IMF approved to sell 403.3 metric tons gold via market. China has shown its interest to buy gold from IMF as the country is increasingly investing in gold reserves to diversify its forex reserves.

Zimbabwe, once the third-largest gold producer in Africa, has also re-opened many of its gold-mines which could result in more than a quarter increases in its total production to 4.5 MT against 3.5 MT last year.

The G-20 nations won’t stop infusing liquidity into the system in the immediate future. They may call for reduction in international trade imbalances and help other currencies to rise.

The world’s largest gold producer, Barrick Gold Corp plans to record $5.6 billion in Q3 costs to eliminate fix-price contracts as the company bets that prices for the previous metal will climb.

The US president Barack Obama revised its trade deficit forecasts to $9.1 trillion between 2010 and 2019, in comparison with $7.108 trillion forecast earlier this year. In this response, the US plans to borrow an unprecedented $6.78 trillion to finance its burgeoning trade deficit.

Many countries are planning to reduce their reliance on dollar and diversify their foreign currency reserves. In this context, Russia and Brazil have already planned to buy $20 billion of bonds from the IMF, hence cutting their investments in US treasuries. Russia stands 3rd in terms of forex reserves with a whopping $413 billion, as on July 2009. The investments in dollar itself are valued at $140 billion. China plans to buy $50 billion and India may also announce similar funding.

To see the full report: GOLD