Rising Gold- Interview

BIG TALK: KEYUR SHAH, WORLD GOLD COUNCIL-->

‘Returns from gold become more attractive when markets are down’ Sandeep Singh Posted online: Monday , March 24, 2008 at 1423
Over the last two months, while the Sensex has declined by almost 30 per cent, the price of gold has appreciated by 20 per cent. Should investors be concerned about this sudden spurt? Keyur Shah, associate director, World Gold Council, spoke to our correspondent about the reasons behind the steep rise in gold prices, the best way to go about investing in gold, and the ideal investment horizon for investment in this asset class.

What, in your view, are the reasons for the steep rise in gold prices?

There are two reasons: one is the long-term fundamental reason, which we monitor, and that’s the growing demand-supply gap. Demand in several countries like India, China, and the Middle East is growing while supply is failing to keep pace. Hence, prices are going up.The current increase, which a lot many people are worried about, is due to temporary reasons—the main being the fear of inflation. The US economy is slowing down because of the sub-prime issue. The dollar has weakened, and this has led to an increase in demand for gold. Investors look at gold as a safe haven. Many investors are also looking for good returns over the shorter period. When there is inflation fear coupled with weakening of dollar, they shift their investments towards oil and gold. So, the price of gold is inversely correlated to that of the dollar and directly correlated to that of oil.

Is the steep rise in price over a short span of time a cause for concern?

Yes, the volatility in price movement is a cause for worry. If the price of gold goes up by $30 in a day and falls by the same amount another day, it does affect the domestic consumer who buys gold in physical form. If the price increases steadily there is no issue. The price needs to stabilise.
If you say that the volatility in price is a cause for concern, then would you advise investors not to enter gold in the current situation with a short-term horizon?

We have always maintained that gold gives healthy returns and it has never failed investors. This healthy returns becomes really good returns when the markets crash. For instance, in the current market scenario gold is the best-performing asset class. So for an ordinary investor gold is always a good buy. Short-term trading amounts to speculation and I wouldn’t like to comment on that. But gold is definitely meant for long-term investment and it will never fail you.
The slowdown in the US economy has led to a cut in interest rates and to the weakening of the dollar. Against this backdrop, how do you see gold performing in the near future?If you look at the long-term trend and at the demand-supply dynamics, then you can be bullish on gold. What no one can predict is exactly how much it will increase, as near-term price movements depend on short-term pressures. I would say, look at the long-term demand-supply dynamics. By that account one can be bullish on gold.
Do you envisage a scenario in which gold might not perform well?Gold can only perform badly in case of a scenario when there is no war, there is peace everywhere, and there is no inflation. But such a scenario does not exist. Gold has certain intrinsic characteristics: it is a safe-haven investment, a hedge against inflation, and it is the only global currency. So I don’t envisage a scenario when it will not do well.
What is happening on the supply side?

Any new gold mine takes 5-10 years to start producing. By the time the mine starts producing gold the demand for gold rises much higher. So the gap remains as supply lags behind demand. Even at present exploration is going on which will lead to new mines becoming active in 5-10 years. But by then demand would have risen much more.
How is gold correlated to the equity market?In India there is no correlation. Here gold is consumed by the masses who don’t invest in equity. There are gold ETFs (exchange traded funds), but they will take some time to pick up. But worldwide there is a correlation. If the equity market is not performing well, fund managers put their money in other asset classes that are doing well, such as gold or oil.

So can we say that internationally gold is negatively correlated to equity?

Yes we can. It’s a trend that has been observed: whenever stock markets crash investors move to gold.

What would be your advice to investors regarding the form in which they should invest in gold?

It is good to buy gold anytime if the person has a long-term investment horizon. Currently you can invest in gold in three forms: jewellery, bars and coins, and gold ETFs. The form in which an individual chooses to invest in gold will depend on his needs. One who wants jewellery will buy that. Others who want to possess gold in physical form will go for bars and coins. And modern day investors who want to avoid storage hassles will go for ETFs.