Investments, and historically it has proved its worth as the safest investment option. The current year’s massive rally in gold, which reached an all time high further reinforced the view that gold has its appeal intact. However, what happened this year both to global economies and to gold is unprecedented and thus it should not be seen as an example. I subscribe to the traditional view and have always believed in the power of gold as an investment. However, my inclination towards gold is more as a shock absorber in the portfolio rather than an investment
vehicle, which is particularly true in the current perspective. So far gold has witnessed a strong rally, which was primarily due to the fact that investors including governments, bankers, financial institutions and individuals opted for gold as an investment hedge against economic turmoil globally and the presence of recessionary forces in the global economies. Apart from these economic factors a sharp downtrend in the USD also led to a sharp rally in the prices of gold as gold normally has an inverse relation to the USD.
Now with recession giving way to economic optimism, which is strongly reflected by
recent economic data in US, Europe and in emerging economies like Brazil, Russia, India and China and recovery of the USD, gold seems to be edging out of favour.
The global recovery does not mean a slump in the prices of gold, but the broadening of investment vistas following economic recovery would take some shine off gold. Moreover, if the USD recovers further, the hedging factor would fade and this would result in lower demand. Also now with interest rates nearly zero, they can’t fall any further and with the economic recovery setting in, the economic watchdogs of key global economies led by USA could resort to monetary tightening, which would also include hardening of interest rates. It is quite logical that the major global economies can’t keep the interest rates low for long as the rising inflationary forces would force them to opt for prudent economic policies. Ultra loose economic policies are already highly inflationary so eventually the options with the central banks would be to tighten monetary policy. It would be another factor, which would push down the appeal of gold.
Gold will not be back to where it was two years ago. I think that the time has come for gold to
consolidate and 2011 should be a year of consolidation for gold, with a downward bias. Gold may not be a wise investment option at current levels, and investors may get a better chance to acquire gold in 2011.