Experts question role of gold as safe asset after current fall

Last Updated: Mon, Apr 22, 2013 04:36 hrs

Gold prices have stabilised in recent days after a steep fall on selloffs globally. The metal is currently trading above $1,400 an ounce in the global market and is a little above Rs 26,000 per 10g here. Consumers in the two biggest markets for gold, India and China, have since rushed to buy jewellery.

Does this mean the market has stabilised? Many entities in the market say they don't rule out a further fall in prices in the coming weeks or months.

Some analysts say gold was never a safe asset and the bubble was waiting to burst as fund advisors globally started going underweight on it and reduced the proportion of gold as a part of their portfolios.

In fact, such a warning was around for two years but had few takers. Even when billionarire investor George Soros said a few quarters earlier that he had a bearish view on gold, many didn't think so. However, the fall in gold and silver since last week was sharp and historically big enough to scare investors.

Gold prices haven't also benefited even after aggressive monetary stimulus by Japan, a nuclear threat from North Korea and downbeat economic numbers from the US, in typical bear market behaviour.

Says Amit Bhartia, portfolio manager for GMO's emerging markets equity team, "The notion of gold as a hedge against systemic risks is flawed. We believe the concept of gold's role as an insurance policy needs to be narrowed significantly."

On the recent bull run, he said, "The key driver of the significant rise in gold prices since 2000 has been the emerging markets' consumer. Between 2000 and 2010, consumers in emerging markets accounted for 79 per cent of total demand."

Now, since the economies of the major contributors to the gold demand, China and India, are in a downcycle of growth, gold demand will also be affected. He said, "Gold prices not only have extensive exposure to China and India but their exposure to these countries is pro-cyclical by nature. Given both the cyclical and structural challenges the Chinese and Indian economies are facing, we believe the risks to gold prices today are particularly high."

Analysts believe gold prices could fall another 10 per cent from here, below $1,300 an ounce.

Merrill Lynch said in an April 16 report, when gold was at $1,350, that it could fall further but the downside to the price might be limited to an additional $150/oz.

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