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Why gold will continue its rally: 5 reasons

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New Delhi:

1. Investment in gold is attributed to investors seeking protection of wealth in case the economy is not looking up, if not faltering. Given the 'fiscal cliff' in the United States and poor industrial production data back home, gold is is expected to rally, at least in the near term. Also tending to bear a good price per gram in futures trade, gold is about to become an excellent choice for investing.

2. On Monday, the rupee fell to a two-month low. More than often it is seen that commodities and the currency follow an inverse relationship. If the currency rises, commodities fall. Given the recent falling trend in the value of rupee against the US dollar, it is likely that gold will see buying.

3. The Reserve Bank of India (RBI) is unlikely to revisit interest rates in the near term. The bank's contention is that a cut in interest rates will fuel inflation. This is being viewed as an anti-growth stance by corporate India. On Sunday, Prime Minister Manmohan Singh backed the RBI, saying growth and inflation need to be balanced. This fuels talks that a cut in interest rates is unlikely in the short term. Given this, investors are more than likely to go for safe haven investments, and what better than gold.

4. The much-talked 2G spectrum auction received a dull response from telecom companies on Monday, and it is unlikely that the government will be able to realise its target of Rs 40,000 crore from the sale of the radio waves. Till now, the government is expected to rake in a little below 25 per cent of the target. Also, the government's disinvestment drive for the fiscal year is expected to fall short of expectations, like in the last financial year. All this shakes the confidence on the overall health of the economy given the poor IIP show and no near-term surety on a rate cut so more liquidity can be infused in the economy. All this is likely to add to the investor sentiment while going seeking gold as an investment.

5. Barack Obama's re-election as the President of the US has caused some commotion on the Wall Street given the economic stance of the President. If investors turn away from the stock markets, their portfolios are expected to see more of gold.

Story first published on: November 12, 2012 18:19 (IST)

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