Sensex & Gold: Golden highs
Puneet Jain/ Economic Times/ 12th December, 2005
Investors are reeling from the twin euphoria of historic highs in the stock market as well as gold prices. Both have increased the wealth of the common Indian significantly and that should keep our economy ticking very well into the next few months. Gold prices have risen to a 24-year high with the yellow metal climbing to $520 per troy ounce in the international market and crossing Rs 7,800 per 10 gms in India.
In this column, we have strongly advocated investments in gold over the past two years, and much of that assessment has been accurate for the benefit of those readers who have chosen to follow the advice. Can gold go higher from here? Surely, if the past is any guide to future prices. At its peak, gold has sold for over $825 per troy ounce, and there are widespread expectations that it would cross that peak sooner than later. Some analysts have predicted that gold would rise to more than $1,000 per ounce in next two years.
That would translate to nearly Rs 15,000 per 10 gms in India. While this level is surely possible given the current demand-supply situation of gold, there could be some short-term correction, as the yellow metal appears to be getting overbought. Therefore, those who intend to invest in gold for the long term could wait for a technical correction to buy the metal at a lower price. Gold prices in India are also closely linked to the rupee-dollar exchange rate.
In case the rupee strengthens after December as widely expected, there could be a short-term dip in gold prices. However, we remain extremely bullish on the commodity in the long term of about 2 years. Those who find gold prices intimidating may consider investing in silver as the white metal too could see a sharp move going forward. We just hope that the government can quickly sort out the mess over the regulation of gold funds or ETF so that small investors too can get the benefit of appreciation of gold prices.
Undoubtedly, investments in gold will play a crucial role in hedging against the risk of crash in prices equities and other assets. The other big boon for investors in India has been the unprecedented rise in stock indices that have made millions of Indians richer. With the Reliance demerger plan approved by the Bombay High Court, a major milestone has been crossed by the stock market with respect to short-term targets. Stock indices closed at their highest-ever level supported by the strong performance of Reliance Industries' stock. However, the key question is, where can the markets go from here?
Surely, the short-term momentum in equity markets is extremely positive. Indices could easily head higher backed by rise in index heavyweights. However, the bull sentiment is yet to touch many other stocks in the market. With more foreign funds investing in India and corporates continuing to do well in terms of earnings momentum, the market could stay buoyant until the announcement of the December quarter results. However, prudent investors should continue to book profits wherever possible to maintain their finance.
