As usual, gold rises when worry deepens

Central banks, funds, institutional investors all expected to turn more to the traditional safe haven as dollar staggers.

Gold could be a major beneficiary of the US rating downgrade, being the usual investment alternative to the dollar. Any investor having dollar assets, and that includes central banks, would search for an alternative. As in the past, gold would be a safe bet.

Even after the 2008 crisis, gold has been the best performer among all assets class, giving 100 per cent return. Several central banks, led by those of China and India, bought gold in the past one or two years.

The central banks of emerging economies are expected to be the biggest price boosters. Mexico’s central bank, for example, bought 93 tonnes of gold in a three-month period. China, Russia, India, Thailand, Sri Lanka and South Korea have also been stocking on the precious metal, while industrial countries, especially from Europe, have stopped selling their gold reserves.

There are no equally big comparable economies where investment can be shifted as the US. However, according to Gnanasekar Thiagarajan of Commtrendz Research, “central banks will start looking at gold as an alternate. Incremental reserve investment and diversification decisions could weigh higher in favour of gold.” He includes the BRIC (Brazil, Russia, India, China) nations in this

After the September-October crisis, gold fell marginally in immediate futures and has since more than doubled to $1,663. It was $712 in November 2008.

Not only central banks, investors in general would also be attracted. “In case of downward macroeconomic sentiment, funds look for alternativee avenues. Despite gold prices moving around the record high, investors will continue to park their funds in this asset class until a new safe haven emerges. People would like to invest their savings in an asset class which has provided better returns and has such potential further. If the US economy loses lustre, gold will move up,” said Kumar Dasgupta, partner, PricewaterhouseCoopers. “In the US, there is no willingness to make the sort of cuts in spending that would be required and policy leaders are quite prepared to let the dollar sink.”

Those who look for near-term weakness cited the potential for more selling of gold to meet margin calls and cover losses in other markets, as was reported during a decline from record highs last Thursday, when equities tumbled. The market participants also cited potential for a technical correction in the market, with buyers perhaps hesitant to keep rushing in at the highs without some sort of pullback.

In the year 2000, according to Bloomberg, the price of gold fell to an average of $272 per ounce. But after the terrorist attacks of September 11, 2001, the trend reversed.

According to the World Gold Council, an independent association of gold producers, the US was hoarding 8,133 tonnes of gold in June, followed by Germany with 3,401 tonnes. All the world’s central banks together have stockpiles weighing 27,300 tonnes. Adding these to the International Monetary Fund’s holdings and those of the Bank for International Settlements, the total amount kept in reserve is 30,800 tonnes, about a fifth of the 165,000 tonnes estimated to have been mined since record-keeping began.