With the global economy undergoing a risk equation rebalancing across asset classes, as reflected by a directionless trend over equity markets worldwide, gold is expected to gain some sheen in the days to come.
“Gold initially goes down with all other asset classes when there is a sell off. But the yellow metal will be the one to bounce back first,” said T Gnanasekar, director of Commtrendz Risk Management Services. He expects gold to hit $850 per ounce by the end of the calendar year.
“The underlying factors look favourable to gold. Though gold prices may see lower levels of around $640 per ounce in the near term, they are expected to hit the $850-levels by December this year.” Gold closed at $673 per ounce on the Comex.
A stronger Yen (a cheap source of borrowed funds at 0.5 per cent), which along with defaults in sub-prime loans contributed to a declining credit risk appetite in the US, has sparked a sell off in securities across the globe.
“It is essentially the appreciation risk. For somebody who has borrowed money from Japan to invest in other countries, appreciation of yen negatively affects profits,” said DK Joshi, principal economist of Crisil.
Corporate credit spreads in the US (the difference between the yield of corporate bonds and that on a comparable maturity treasury), have already widened, indicating a drop in risk appetite.
Investors and hedge funds have used the yen carry trade to drive up the US credit and equity markets in the recent past. Now, with investors across the globe turning risk averse, positions built up in various securities are expected to recoil, thus resulting in a rush of funds into gold, the safest investment haven under adverse economic conditions.
Further, if the rupee weakens against the dollar, domestic gold prices will get an automatic fillip by the same magnitude.
“A stronger rupee reduces the price of landed gold, more or less by the extent the currency is overvalued. Now, it has to get adjusted somewhere. This means that any person who buys gold now stands to generate returns to the extent the rupee weakens by,” said an analyst with a domestic brokerage.
At 3:20 pm on Saturday, gold for December delivery was trading at Rs 9019 per 10 gram, up Rs 2 from the previous day’s closing price.