Investors bet on dollars as gold fails safety test

STOCK-TAKING: SAMVAT 2064

Despite the global turmoil, gold prices have been falling, of late. It’s no more being seen as a safe haven. The yellow metal has failed to perform in the past years of crisis too.

Looking at the Samvat year’s performance of various assets, it is clear that gold has not performed. This only proves that the yellow metal, at best, acts as a capital protector.

During Samvat 2064 that has just ended, the global financial instability and liquidity crisis eclipsed stocks and financial markets all over the world. This Samvat, the international price of gold declined by 14.03 per cent compared with a rise of 42.2 per cent during the previous Samvat.

In 2001, when terrorists attacked and destroyed the World Trade Center’s twin towers in the US, and when dot-com companies went bust, gold prices were up just 4.96 per cent on an annual basis.

The year 1997 is remembered for the South-East Asian currency crisis, which began in July that year. In that Samvat, gold fell by 19.22 per cent.

For Indian investors, Samvat 2064 has given a return of 11.79 per cent despite a fall in global prices by 14.03 per cent as the rupee has fallen against the US currency by 26.80 per cent.

This shows that generally in the year of a crisis, capital flows to safety. This year, capital flowed to the US dollar, which was considered as a safe haven, and not gold.
 

TRACKING MOVEMENTS
	Sensex	Standard Gold Rs/10 gm	London Gold $/ounce	USD
11/10/1996	3080.26	5140	385.15	35.75
10/27/1997	3934.33	4300	311.13	36.15
% Chg	27.73	-16.34	-19.22	-1.12
10/26/2000	3757.16	4530	265.15	46.06
11/14/2001	3113.04	4625	278.30	48.06
% Chg	-17.14	2.10	4.96	-3.04
10/21/2006	12736.82	8770	591.50	45.31
11/8/2007	19058.93	10605	841.10	39.33
% Chg	49.64	20.92	42.20	13.20
11/8/2007	19058.93	10605	841.10	39.33
10/27/2008	8509.56	11855	723.09*

49.87  % Chg-55.3511.79-14.03-26.80 * As on 27/10/2008-1800 hrs IST

“In these turbulent times, as seen historically, there has been a flight to safety, contributing to the rise of the US dollar.” said S Ramesh, the COO of Kotak Mahindra Capital.

A strengthening of the dollar has kept import costs high. Since India is largely dependent on gold imports, a fall in the value of the rupee has resulted in some gain in gold prices compared with those during the last Diwali. During the 1997 South-East Asian crisis, the Sensex rose 27.73 per cent and the rupee was down just 1.12 per cent against the dollar in the corresponding Samvat because India was not as open or globalised as it is today.