The Hindu Business Line : Gold races to a new high

Mumbai, Oct 10 Even as the stock market bled, gold showed big gains on the domestic bourses on Friday with a phenomenal spurt of over Rs 500 per 10 grams. In the afternoon session, the metal was trading at Rs 14,100 per 10 grams (December 2008 contract), the highest price recorded in rupee terms. Interestingly, contrary to the general tendency, the spot market for gold was ruling higher at Rs 14,300 per 10 grams. Traders attributed it to the traditional rise in demand during the festival and marriage season. It also coincides with harvest time and improved liquidity in rural areas.

Impact of weak rupee

Clearly, gold prices are tracking not only overseas cues but also changes in the currency market, an analyst told Business Line. Although overseas markets for the precious metal have been rather volatile in recent days because of the ongoing financial market turmoil, the latest spurt in the domestic market could be attributed to sharp depreciation of the rupee.

A weak rupee, rise in international prices and seasonal demand have combined to boost the metal. Market participants asserted that the current elevated prices are more a currency play than justified by market fundamentals.

Investors are going for gold as part of asset diversification, as it has the safe haven status, said one trader. Contrasting the situation with the one that obtained earlier this year, he said when gold prices raced to $1,000 an ounce, the domestic market ruled at less than Rs 12,000 per 10 grams, primarily because the exchange rate then was just around Rs 40 to a dollar. Now the rupee is weaker by a fifth at Rs 48 to a dollar.

Watch on dollar

If experience is any guide, higher prices invariably result in demand compression. The Indian market, in particular, is price-sensitive. The effect of the bull run on demand will be known soon, commented a trader.

Investors are closely monitoring the movements of the dollar vis-À-vis the euro. There is expectation that at least in the short run, the dollar would weaken against the euro which, in turn, would prove positive for gold.

Taking a cue from gold, silver too made rapid gains and was quoting at over Rs 20,000 a kg.