The dollar is declining and inflation is lying in wait. Market conditions are waving red in the face of gold bulls.
So far this year, gold prices are up about 22 percent to nearly $750 an ounce - helped by the declining dollar and growing interest from institutional investors.
And given a confluence of factors, including heightened seasonal demand, analysts believe that prices for the precious metal will move higher still and are poised to shatter its all-time record.
Historically, gold has been considered a safe-haven for investors jittery about inflation or the economy.
With skittish investors diversifying their portfolios with commodities, demand for gold has shot up. During the summer's market meltdown, prices remained modestly higher compared to the start of the year before moving higher in recent weeks. Just last week, gold hit $744.80 an ounce - its highest level in 27 years.
Many analysts say the biggest driving factor has been the weakening dollar. A weaker greenback makes gold, which is priced in dollars, more attractive to buyers outside the United States.
At the same time, worries about inflation have also stoked gold prices, according to Jon Nadler, an analyst with Kitco.com.
Indeed, gold typically attracts investors looking for a hedge against inflation. That factor has become especially important now with oil prices near record highs and after the Federal Reserve cut interest rates last week for the first time in four years.
And gold could find even more support at the consumer level. Typically, the period from September through year's end sees demand for gold climb in the United States amid the holiday shopping season. Demand is also high in India, the world's largest consumer of gold, because the next few months are a popular time for weddings and mark the celebration of the Hindu new year.
Of course, if interest by institutional investors or hedge funds wanes or consumer demand for jewelry slackens amid weakened consumer spending, gold prices could move right back down, according to experts.
How high?
By some analysts' estimates, gold prices are headed for $750 an ounce by the end of the year.
Peter Spina, an analyst with GoldSeek.com, speculated the price could even top its all-time high of $850, set in January 1980.
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Friday, September 28, 2007
Gold prices: Nowhere to go but up
Thursday, September 27, 2007
The rising rupee, foreign trade & inflation
As the popular saying goes, the difference between a pessimist and an optimist is that whereas the former sees the glass as half-empty, the latter perceives it as half-full. The reality is the same; it is the inference that matters.
Take the figures for the first quarter of 2007-08 in regard to foreign trade. Exporters rightly crib about the lower realisations consequent to the appreciation of the rupee against the dollar - by more than 10% over the same quarter of last year. Imports have accelerated, and may be attributed to the cumulative impact of an economy growing at a robust rate and possibly the lower price tag for overseas goods in rupee terms, which has also fuelled demand.
To those who see these issues in perspective, what is a cause for concern is the sharp drop in the import purchasing power of exports - from 71% to 61% - during the latest three-monthly period over that of the previous fiscal. In another era, the burgeoning trade deficit that has nearly doubled to $21 billion may be viewed as very troubling; now the context is different; with forex assets at more than $200 billion and swelling weekly, we are in a position to make light of it.
However, there is another angle to the steady climb of the Indian currency against the greenback, namely the possibility that its impact on inflation may be benign. In its latest monetary policy review, the Reserve Bank of India drew comfort from the fact that the pass-through effect of monetary, fiscal and supply-side measures, in conjunction with seasonal factors has brought the inflation rate to below the stipulated threshold limit - 4.4% from 5.9% as of end-March 2007. Perhaps this assessment was too laconic to permit an elaboration of the role of strengthening rupee vis-à-vis the dollar in influencing the inflation rate on a downward course. We shall revert to this topic later.
Let us dwell upon the several strands of the issue one by one. Exports have fared badly during the April-June 2007 period, rising by a meagre 7% in rupee terms, though in dollar terms, the growth rate is definitely better at 18%. The setback in terms of rupees is easily explained; the foreign buyer, finding that he has to fork out more dollars to buy Indian rupee-dominated goods, has tuned to other markets seeking price advantage. This has adversely impacted on the export performance. The exporters too are despondent that the declining fortunes of the dollar have meant diminished earnings in terms of rupees. This trend is a distinctive to our export effort and to the realisation of the target of $125 billion set for 2007-08. But gyrations in the forex market must be taken in stride and overcome through conscious drive for quality and cost-cutting to retain and expand overseas markets.
The second point to note is that our imports have maintained a high order of increase during the first quarter of the current fiscal - 34% in dollar terms and 22% in rupee terms. Despite a negligible rise of 4% in oil imports when denominated in dollars -in our currency, oil imports have recorded a negative growth rate -it is the non-oil imports that have really soared - by 50% in rupee terms and much more in terms of dollars. This is possibly a sequel to the high rate of economic growth that has led to a keen demand for capital goods, non-ferrous metals and export-related imports such as pearls and precious stones, chemicals and cashew. With the dollar weakening against the rupee, imports also became cheaper and hence the boom in overseas purchases. Seen in this context, this development is not a cause for worry.
The third fall-out of the firming up of our currency against the dollar may well be the easing of inflationary pressures of late. Unfortunately, the nexus between the two has not been highlighted in the RBI policy statement. In reality, this is quite simple. When the rupee strengthens in the forex market, it means lower prices of imported goods in terms of our currency. In turn, the cost of imported items tends to fall in the home market. They figure as intermediaries, raw materials and capital goods for which, in rupee terms, we pay less now than, say a year ago. Of course, bulk consumption goods like pulses and edible oils too which figure in our imports, for which we pay less rupees per dollar. The cumulative impact of all these factors is the moderation in the inflation rate.
In sum, the strong showing of the rupee in relation to the dollar is not an unmitigated evil as it is made out to be. It is not and the taming of the beast of inflation may be a direct sequel to this trend.
Thursday, September 20, 2007
Indian rupee breaks through 40 per dollar level for 1st time since 1998
The Indian rupee rose to a nine-year high against the U.S. dollar Thursday amid strong demand from foreign funds investing in one of the world's fastest growing economies.
The rupee rose 0.7 percent to 39.88 per dollar, breaching the psychologically crucial 40-per-dollar mark for the first time since May 1998.
The rupee has appreciated more than 10 percent against the dollar so far this year as global investors have flocked to India, where the economy is growing about 9 percent annually and the stock market has been climbing to record highs.
Analysts expect the rupee to remain strong through this quarter, although that could hurt exporters, especially the country's hugely profitable outsourcing industry.
"It will stay around 40 for some time," said Agam Gupta, head of foreign exchange trading at Standard Chartered Bank in India.
The rupee's strength has come despite measures by the Reserve Bank of India to counter a surge in foreign money into the country that also has fueled inflation. Last month, the central bank installed several curbs on overseas borrowing by Indian companies and ordered banks to hold more cash in reserves.
But Gupta said the central bank can do little to stem the flow of money from other sources.
"A lot of inflows have been in the form of foreign direct investment and investments in stocks and bonds," he said. "Those inflows will continue."
Foreign institutional investors have bought US$10.1 billion in Indian stocks and bonds so far this year, according to the Securities and Exchange Board of India. That money is on top of a record US$16 billion India received as foreign direct investment in the last fiscal year that ended March 2007.
The rupee got a boost after the U.S. Federal Reserve made a bigger-than-expected cut its key interest rate Tuesday, stoking expectations that investors will bring in more dollars to take advantage of higher interest rates here and a bull run in the stock market. The rupee gained about 1 percent against the U.S. dollar in Wednesday's trading.
India's benchmark interest rate is now 7.75 percent, 3 percentage points higher that the Fed's key rate, and it's unlikely that the Indian central bank will cut rate soon.
Market players will likely revise their projections for the rupee-dollar rate following the Fed move, Gupta said. Most foreign exchange traders earlier expected the rupee-dollar rate to average around 41 during the October-December quarter.
That is bad news for exporters, whose overseas earnings are eroded by the strong rupee.
Indian Commerce and Industry Minister Kamal Nath said the rupee's strength was "a cause for concern" and the government may have to revise the export target of US$160 billion set for the current fiscal year.
Trade data released earlier this month showed exports growth have already begun to decelerate.
"It is a new situation and requires a new response," Nath said, adding the government would explore measures to help exporters tide over the impact of a stronger rupee.
Tuesday, September 18, 2007
Dollar drops after Fed cuts more than expected
The dollar fell against its major counterparts Tuesday, hitting a new record low against the euro, after the U.S. Federal Reserve cut its benchmark federal funds rate more than many investors had expected, thereby lowering the return on dollar-denominated assets.
The central bank cut the fed funds rate for the first time in more than four years to 4.75% from 5.25%, and also cut its discount rate by half a point. Most economists and investors had expected the Fed to trim its benchmark federal funds rate at least 25 basis points, with some predicting the 50-basis point reduction.
The dollar index, which tracks the greenback against a basket of six major currencies, was at 79.375, down from 79.645 before the announcement.
The pound sterling was at $2.0122, compared to $1.9982 earlier.
The dollar was up at 115.65 yen, down from 115.80 yen earlier.
While lower interest rates are dollar-negative in the long term, rallying stock prices after the Fed's policy decision provided daily support for the U.S. currency Tuesday.
"Expect further dollar weakness in the days to come and expect further strength in the stock market and carry trades," said Kathy Lien, chief strategist at Forex Capital Markets. Carry traders refer to the practice of borrowing funds in lower-yielding currencies and investing them in higher-yielding ones.
Stocks were trading solidly higher Tuesday, and surged after the Fed's announcement. See Market Snapshot.
Crude-oil futures were higher after the Fed move, after earlier touching a new front-month contract high of $81.50 a barrel on hopes that the expected interest rate cut will boost energy demand. See Futures Movers.
