Saturday, January 9, 2010

GOLD INSURANCE COVERAGE


If some one plans to go for some robbery then my advice will be not to runaway with cash. But to run with a handful of gold. Yes run with a bagful of gold rather than running with currency. Since gold might show $3000 ounce in the next 2-3 years. Shocked and many of my readers might have acclaimed me by now I am quite lunatic in making such a predictions.
Apart from huge list of fundamental and technical reasons some more stories is behind the future predicted prices of gold. Gold have already replaced the green back. Even as there are no other form of keeping investments other than currency, gold have replaced that place. But apart from these basic reasons behind the gold rally in 2009 we find further strength in the future price of gold.

When we dig in to the facts and figure we found some interesting facts and figures which depict a different invisible analysis behind the gold price of 2010.

China is mad at chasing and accumulating gold and it seems that will control the price of gold similar to control exercised over steel and other metals.
• According to the China Gold Association (CGA), the estimated demand for gold in the country was 450 tons in 2009, up 13.8% from 395.6 tons in 2008.

• On of the main reasons behind china to build reserves of gold are they are feeling shaky about the dollar free fall.

• China holds a reserve of 2 trillion treasuries which represents 60% of US treasury in dollar form. Any hiccups from that will save the china from the insurance cover of gold investments.

• Chinese household income is increasing resulting to Chinese consumers are buying more jewelry and investing in gold. This is also the reason behind the rising demand of gold in the international market.

• China is already the largest gold producer in the world with an output of around 282.504 tons in the first 11 months of 2009. The figure represents a 14.6% increase over the same period in 2008.

• According to China Gold Association, the estimated demand for gold in the country was 450 tons in 2009, up 13.8% from 395.6 tons in 2008.

• China is also expanding the mining segment too.

• Chinese miners are also eyeing overseas resources to expand their footprint. The latest move is Zijin's $498 million takeover offer for Australian mining company

• A deal that will help secure copper and gold mining assets in the Philippines.

• Foreign governments have long stockpiled U.S. dollars to shore up their own currencies. And as the buck has sunk with our weakened economy, nations like China have been selling dollars to boost their gold holdings.

• Selling more dollars will increase the flow of dollar resulting further flow of dollar in terms of other currencies.

The below picture shows the price of gold in 1 year.


We find that gold price on January 2009 was around $850 and it touched a high is November 2009 to $1200.Before that we find that gold was trading within a range of $900 to $1000 levels. During that time the world economy was struggling to stand up.

If we look into the 5 years gold chart.


We find that gold have been on a path of steady recovery once the world economies started their bull market rally with growth of economies in every country around 5% mark.

We have heard many times gold is being used to hedge against inflation. I think we need to explain this process so as to get the real picture of the gold price in future.
Gold is famous for being used as a hedge against inflation. We strike the chord when we dig and found that  the most consistent factor determining the price of gold has been inflation. When  inflation goes up, the price of gold goes up along with it. Since the end of World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%.
Today, a number of factors are conspiring to support  the perfect inflationary storm: extremely stimulative monetary policy, a major tax cut, a long term decline in the dollar, a spike in oil prices, a mammoth trade deficit, and America’s status as the world’s biggest debtor nation.

Gold is bought and sold in U.S. dollars, so any decline/upward in the value of the dollar causes the price of gold to rise/fall. The U.S. dollar is the world's reserve currency - the primary medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency primarily held as reserves by the world's central banks. However, now that it has been stripped of its gold backing, the dollar is nothing more than a fancy piece of paper. Gold is also called by "crisis commodity" since it tends to provide healthy return when other investments during periods of world tensions are incapable to generate returns. We have already witnessed this after the US and UK bank collapse.

Along with these their some more host of analysis yo justify the upward rally and $3000 ounce gold price.

• There is no doubt that the government’s efforts to stimulate the economy have pumped massive amounts of money into the financial system. This has also spurred the commodities prices in the sideways. From RBI to US FED all are concerned over this rising inflation which cannot be avoided.
• Rising fiscal deficit of US which is already floating at the rate of 12% of US GDP will keep the dollar under pressure. Even in the year of 2010 this pressure will continue as US government is less interested to go for a hike in cost of interest. This will also lead to flow of cheap money. Moreover the US government has less scope to impose measures and techniques by which they can increase the revenue at their end. So falling dollar will force the world economies to change their form of saving their investments in dollar form.

• So when their will be no profit of keeping investments in dollar form gold is the perfect replacement for dollar. More over rising interest cost in the future across the world economies and rising imbalances will make the fluctuation of currencies more volatile.

• This increases the risk of investments holding in the form of currency. In other words the biggest risk which is waiting for the market now is the massive fiscal and monetary stimulus packages adopted by world economies and the uncertainty about how governments will exit them. This will exert pressure currency particularly dollar.

• Rising inflation will be hedged by gold where as gold will have more increased valuation. Return over gold investments will be more as compared to keeping the investments in dollar.

But we will get correction in gold during those times when dollar will rise followed with every steps of interest rate hike and exit policies of stimulus by world economies. Those times will the buying opportunities of gold. We should not get surprised if gold rose to $3000 ounce riding on the dragon of china building reserves and world rising inflation.Gold is accumulated to protect against falling dollar as China and many countries hold dollar reserves.Rising inflation and uncleared exit startegies of stimulus will make currency to devaluate more.Gold is the insurance to cover and protect from all these riks.In 2010 we will find gold demand touching new heights followed with price hike.

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