Gold Price bottom

A contrarian take; on why the worst may be over…

Frankly, it is hard to see a bullish report on gold in the global scenario. Let us look at gold prices in dollar terms. Between August 2011 and August 2015, the dollar price of gold has fallen from $1900 / troy oz to below $1100 / troy oz. As if this 45% fall was not enough, most market analysts are predicting that gold will go below the psychological level of $1000 / troy oz. While it is hard to comment on levels, there is a strong possibility that gold may begin the process of bottoming out. Let us bust a few myths about gold.

Not an inflation hedge any longer…

The key argument against gold is that it is no longer an effective hedge against inflation due to its volatility. To an extent it is true that gold prices have become volatile. But then it is also true that gold cannot be evaluated over a very short-term horizon. Let us take an example of the global scenario. The price of gold was around $40 / troy oz in 1971. From that point it has grown to $1100 / troy oz in 2015. That is a CAGR of 7.8% in the last 45 years; good enough to beat inflation by a margin.

Let us also look at the Indian gold prices from 1999 to 2015. In the last 16 years the price has moved up from Rs.5,000 / 10 gm to Rs.25,000 / 10 gm. That is a CAGR of 11% over the last 16 years; again good enough to beat inflation. So over the longer period of 15 to 50 years, gold has beaten inflation by a margin.
Too much dollar dependency…

The biggest tragedy of the current economic situation is that too much is being read into the dollar dependency of gold. Perhaps, gold is paying a steep price for its dollar denomination and its fundamentals are getting ignored. The only reason gold is falling today is the expectation that a Fed rate hike will make the dollar stronger and thus gold weaker. Sadly, this is an argument that predicates on the dollar, rather than gold as a store of value.

Back to global turmoil…

On the 70th anniversary of the bombing of Hiroshima, defense analysts have predicted that the world may be closer to the brink of another nuclear aggression. While it may be a rich argument, the turmoil is surely there. Be it Russia, Syria, China, Iran, Yemen or Africa! And in a global turmoil, it is gold that you turn to as a safe haven.

Currencies are being debased…

For 7 years the world has survived by debasing currencies. While it has inflated assets, we have seen limited productivity gains. The day the dollar cannot hold as a strong counter, global currencies will start debasing. That day, gold will be the only currency to hold value. Remember, asset prices bottom out when the last bull is squeezed out. We are seeing that in gold today! ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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