AK NOMICS: The lustre of gold

The James Bond movie Diamonds are Forever was an interesting one, and Gold Rush featuring the inimitable Charles Chaplin was memorable.

Those who invested in gold since the last calendar quarter of 2007 even as the equity markets in India rolled on like a seemingly unstoppable juggernaut would have found the experience equally memorable.

To cut to facts, gold prices have ascended almost vertically in the past month and now stand within striking range of $1000. With prices gaining well over 15 per cent since January 2008, this yellow metal which has historically been used as a hedge against rising inflation and falling prices of other asset classes, has been shining bright.

The proverbial million-dollar question now is… Is this price level for gold sustainable?

The primary reason for higher gold prices can be attributed to the weakening of the US economy, which has led to further depreciation of the dollar as compared to other major currencies. Furthermore, falling markets across the globe have made investors seek safer avenues of investment. Rising crude prices too have contributed to the upswing in the price of this precious metal.

Another important factor in India that could lead to higher prices is the rise in tax exemption limits announced in the latest Union Budget, which would lead to higher disposable incomes in the hands of individuals, and in turn, trigger more savings.

These savings may again find their way towards investment in the yellow metal as the stock markets here have become far too volatile for investors with limited risk appetite. For now, it seems likely that gold prices may soon touch the $1000 mark and even soar higher. Nevertheless short-term investors should tread cautiously as like all other asset classes there is always a price risk attached, given that prices have risen sharply and may well correct once it crosses the psychological $1000 level.

However, in the long-term, given the rising global demand for gold against limited known sources of supply, coupled with a host of factors mentioned above and compounded by the spectre of terror strikes across the globe, chances are, gold will always remain a decent bet as an asset class of choice for those averse to high risk investments.

As for those, with the appetite for risk, perhaps the bloodied equity waters could be tested through an ELSS investment in a Tax Saving Equity Mutual Fund Scheme, which will also provide a tax-shield under Section 80C. Depressed NAVs owing to stock-holding values being battered and the inbuilt three-year lock-in to avail of the tax break make it worth a look in when one evaluates the Risk-Return equation. Perhaps, the booty earned at the end of three years from such ELSS investments can be invested at the Gold Souk in Dubai.

The author heads Lotus Knowlwealth and blogs at www.theipoguru.blogspot.com