Is gold the best investment ?

CHETAN GUPTA

The people who invested in gold must be happy, particularly those who either through their foresightedness or luck got into the investment of gold since 2001. Gold has registered a five-fold increase in prices from 2001 till date which works out to compounded return of better than 20 per cent a year. Even after such a torrid performance there are no signs of a bubble forming in the prices of gold, with it edging higher each year.

The factors that pushed gold prices to its highest levels of over USD 1,430 per ounce last year are still active in the market. Owing to better growth prospects and higher incomes the demand for gold from emerging markets like China and India continues to be strong. Production growth is not matching demand as was the case in the second quarter of 2010 when gold demand rose 36 per cent year over year while supply was up only 17 per cent. The real interest rates are still near to zero and people’s concern about monetary policy is still intact. The sovereign debt crisis in Europe is far from over and spreading to other nations. The fiscal deficit is still very high and has reached a point where more defaults / bankruptcy cannot be ruled out in the coming year.

After all, these countries have already started to monetise the debt and the possible need for further stimulus packages and quantitative easing is high. All these factors will lead to higher gold prices.

 Already high liquidity pumped in by various governments to bring back their respective economies is going to result in higher inflation which will again push up the prices of gold.

With the world committing trillions of dollars to various bailout packages, the gigantic proportions of debts will lead to enormous budget deficits and as a consequence the US dollar will continue to be weak in 2011. A lower dollar is always better for the gold. It will also affect the confidence of investors thus switching their reserves from dollars to gold.  Excessive fiscal restraint adopted across Europe will make things difficult as spending cuts and tax increases will hurt personal incomes and corporate profits resulting into diminishing tax revenues and slowing the recovery process. It will further affect the credit worthiness of euro nations and will push central banks to take more positions in gold as a safe tradable instrument.

In the present economical and political context gold becomes the most trustworthy and realistic investment instrument and is a safe haven.

I certainly believe that gold has a good chance to gain in 2011 and trade above USD 1,600 per unce before the end of 2011.