Golden run

It is fascinating how the price outlook for any commodity can change so radically in a short space of time, when not much seems to have changed on the ground. Only last May, the US investment banking firm, Goldman Sachs, forecast world gold prices reaching $1,840 an ounce in six months time, with some others even talking of it testing the $2,000 mark. But last week, the same Goldman Sachs predicted prices to fall to $1,390 a year from now. This, even as the yellow metal has already plunged below the psychological $ 1,500-an-ounce level.

Going from extreme bullishness to bearishness is understandable when accompanied by marked changes in fundamentals or sudden unanticipated events: Collapse of Lehman Brothers, actual exit of a European Union member-country, outbreak of war in the Persian Gulf, and so on. When everyone was bullish on gold, the main reason offered had to do with excessive monetary loosening by western central banks and the associated fears of a general debasement of fiat currencies, including that of the dollar. That, combined with concerns over sovereign debt woes in Europe, America's unresolved fiscal problems and instability in West Asia, made many to see gold as a compelling investment both from a ‘safe haven’ as well as ‘currency of last resort’ perspective. The question to ask is: Has anything changed to merit a revised outlook today? The facts on the ground are that in the last couple months, the Bank of Japan has also joined the ‘quantitative easing’ party, while Cyprus has become the first Euro Zone country where bank depositors have actually been robbed of their money. Nor does one see any signs of an end to the political gridlock over the federal debt ceiling or deficit reductions in the US. Meanwhile, the latest round of talks over Iran’s nuclear programme has failed, even as there is a ratcheting up of tensions now in the Korean Peninsula.

So, if the fundamentals haven't really changed, what explains the current selling in gold? Well, the answer is simple. Gold had an extended bull run that took its prices from around $ 275-an-ounce in end-2001 to a peak of $ 1,895 towards early September 2011. Like in all commodities, this one, too, had to end sometime. In the case of gold, though, there were some additional factors – loose monetary policies and evaporation of trust in fiat currencies, leading even central banks to hold a larger portion of their reserves in the yellow metal – justifying a bullish stance. Those factors, to be sure, would remain relevant. At the end of the day, gold has few rivals as a store of value. After all, one needs hardly 4 kg of gold to save one crore rupees worth of money. And given its proven record as a long-term inflation hedge, one shouldn’t ever make the mistake of writing the epitaph for gold.

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