In the recent time we have all been observing the constant rise in the price of Gold all over

the world. Looking at the interest Gold has generated among the investors, business community, and economists we have tried to explain the reasons of the changes in price of Gold, its relationship with other key indices and commodities, and the expected future trend. Normally it is Oil that dominates the news because of its direct cost implication on the economy, but recently Gold has been shining a lot more. Gold gets dug out in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head seeing the interest of human being in Gold Warren Buffett After quoting Mr. Warren Buffett its important to mention here that Gold benefit really emerges during crisis and 4 8% allocation to Gold is suitable for a mid risk portfolio. At any given point there are many factors (GDP, Inflation, Crude Oil, Currency fluctuation, Stock Market, Interest Rate, Gold Prices) working together and we have attempted to understand their movements and correlation in order to take informed decision on Gold in the future. Golds irrational Price movement: Understanding Gold Gold price movement have been traditionally irrational as it is not undermined by any economic returns and reflect nothing tangible not even the US$ price level. Unlike equities and bonds or other commodities, Gold is not correlated to general economic activities or financial indices. Economically gold is a non investment. Nor it is like any other commodity the price of which is determined by commercial demand and supply. The reasons for the investment in Gold are: Jewellery purpose which is also considered as an investment Investors buy Gold when US Dollar struggles It is regarded as an Inflation hedge When the economy is in crisis Political instable environment in key economies of the World.

Unlike any other commodity the price of Gold should also be determined by principle of demand and supply but we must remember that Gold is not like any other commodity as it is rarely used for consumption. One thing that severely impacts the gold price is the bailout plans, the monetary policies of the country, and the future of Dollar. Gold carries no economic returns and has underperformed equities for most of the time, and it does not even move in tandem with consumer prices. The attached graph shows the gold prices and S&P 500 return from 1968 to present. It is clear from the graph that equity market has outperformed the gold for most of the time and is a superior investment than Gold. S&P 500 averaged 4.25% inflated adjusted total return for the entire period where as Gold gave a return of only 3.53%. The area marked in Grey column represents the time period when Gold outperformed S&P 500.

Gold does becomes a relevant investment in the long term when the purchasing power of money is depleting. Gold has largely lived up to its promise of preserving the purchasing

power over the period of long run. However in the short and mid term Gold cannot work as a hedge against inflation. . Oil and Gold Many efforts have been made to find a direct link between the movement of Crude oil and Gold prices; however there is very limited relationship between the 2 commodities but it is very difficult to put an exact ratio to this relationship. From the graph below it is very evident that the prices of Crude Oil (US$ / Barrel) has been more or less static in the last 5 years, but the process of Gold (US$ / OZ) has been increasing. In fact Gold is more affected by the inflation and the fiscal deficit in the major economies than the price of Crude. Gold only responds well to the oil price shocks but acts on its own when oil prices have been docile. This was also observed during the 1970s and 80s; however we are not expecting any such oil shocks in the near future. The only risk factor here could be that USA might declare war on Iran for stopping their nuclear programme, which could be like an Oil shock and will impact the price of Gold. However an increase in the oil price leads to the inflation in the country which has an impact on the Gold price. This relationship is very important and cannot be ingnored.

Gold and Inflation: Gold prices are less affected by the Oil but more affected by inflation rate volatility.

From the above graph it is evident that Gold at times acts as panic asset, thriving on suspicious of governments ability to manage the deficit, losing value of other asset. Further it is also observed that the Golds Bull Run is dominated by negative events and bear runs by positive events in the world economy. Demand and Supply of Gold: The demand supply dynamic is largely irrelevant in the case of Gold, as it is largely an indestructible commodity. Almost all the Gold that has been ever mined still exists, as it indestructible and held closely by people. With 86% of the 163,400 Tonnes in above-ground stock is held in jewellery or bullion and therefore not traded which limits the supply in the market. Gold has 2 supply sources Mining and stock trading. Mining of Gold is not really scalable and almost stable; however the price of mining has increased from US$395 / OZ in 2007 to US$700 /OZ in 2009. Investment demand currently represents the largest component of overall demand for gold compared with a mere 4% just a decade ago. Traditionally, jewellery purchases constituted the overwhelming majority of demand for the yellow metal, with India, China, Turkey and the Middle Eastern countries being the largest buyers. Jewellery demand has been on the decline over the past two years in reaction to the price surge caused by strong investment demand. In fact, jewellery demand contracted by as much as 20% in 2009. Flows have been flooding gold exchange traded funds, or ETFs; they nearly doubled last year. The daily turnover in gold ETFs now at $3- $4 billion a day is up nearly 10fold from levels Official Holding of three years ago.

Even after the collapse of the Gold standard in the 1970s Central bank and supranational institutions such as IMF have continued to hold Gold as part of their reserve. In the last few years it is observed that Oil Producing countries, China, India and few other nations are steadily building their deposit of Gold. Which might seems irrelevant invest economically but will make Gold dearer in the coming years. - USA has the worlds largest sovereign stock of Gold (8134 Tonnes) which is equivalent to almost 27% of the worlds official stock. - Till now the bullion world used to believe that only China is secretive about its gold reserves and other nations are giving out the data properly tom the world. But, now it has emerged that even Saudi Arabia has been hoarding gold for the past year and its reserves have gone up substantially. -The revelation could fuel golds rally as it is a further sign that central banks are keen on gold, after two decades of selling their bullion. Gold prices hit a nominal record high above $1,260 a troy ounce on Friday. Adjusted for inflation, however, bullion is still a long way from its all-time high of more than $2,300 in 1980. -Saudi Arabia is the worlds fourth-largest holder of foreign exchange reserves. According to new estimates that point to the revival of bullion as part of emerging economies official reserves, Riyadhs reserves were 322.9 tonnes, more than double the 143 tonnes it had previously reported. -Analysts believe that central banks could be net buyers of gold this year for the first time in nearly two decades. India bought 200 tonnes of gold from the International Monetary Fund earlier this year, while Russia and others are purchasing bullion from domestic miners on a regular basis, official data show. European central banks, after more than a decade of hefty disposals, have all but stopped selling. Gold and declining Value of US$ -With an ever-increasing US money supply, growing triple deficits and mounting debt at all levels, the US dollar is likely to continue the decline that began in 2001. Since then, foreign holders of US dollar assets have already lost 33 percent of their investment. How long will oil exporters continue to accept declining US dollars? How long will they continue to hold US dollars as their reserve currency? -At some point, they may decide to abandon the US dollar in favour of euros. Should oil producers demand euros, dinars or precious metals in payment for their product, the decline in the US dollar will accelerate while the price of precious metals explodes. If oil producers and other foreign US dollar holders begin to sell the trillions they hold and diversify into alternatives, then the price of both oil and precious metals will rise to levels that today are hard to imagine

- As losses mount, other large, non-oil producing, US dollar holders such as Japan, China, Korea, India and Taiwan would seek to diversify out of US dollars. Eventually, this could result in a dollar sell-off and a corresponding soars. -In addition, Middle Eastern oil producers would be forced to diversify their vast US dollar holdings into increase in oil and gold prices. -In conclusion, the price of oil is poised to rise steadily as the supply/demand imbalance increases and the dollar declines, even if there are no supply disruptions, terrorist threats or geopolitical concerns to consider. As this happens, the price of precious metals will climb further up. The upswing in the Gold price will continue: Gold prices hit a nominal record high above $1,260 a troy ounce on Friday. Adjusted for inflation, however, bullion is still a long way from its all-time high of more than $2,300 in 1980. Investment in gold is the safest option. There may be a question that is it a bubble which is just about to burst. Answer to this question is No, because in order for a bubble to form, you need the public to come into an asset class. The public is pretty dim and it can take 15-20 years before they "catch on". It took 18 before they noticed the tech bubble. Once they do start to "get it" we will have about a year to a year and a half as gold enters the parabolic stage before the bubble pops. We will know when Gold is in Bubble stage when - half of your neighbours will be buying gold (not selling like they are doing now), there will be lines outside the local coin dealer waiting for the next shipment of gold to come in, 7 of 10 billboards you see driving down the highway will have something to do with precious metals, the guy standing next

to you in the grocery store will tell you how many thousands of dollars he made last month off his gold coins and everyone will have become convinced the dollar is toilet paper and will only continue to decline until it has become worthless. Head of the States will believe that we have to go back on a gold standard. In reality no one needs to worry about a bubble just yet. We need to have at least one more serious correction similar to what happened in 2008 or in tech stocks in 1998 to wash out bullish sentiment before we can start the final parabolic run into a true bubble top. If we had to guess then we would say that will occur during the next liquidation event which should be due in mid to late 2012 as the stock market collapses down into the third leg of the secular bear market.

I will hold gold till US$ 2000.00 Jim Rogers (Investment Guru, Author of Gift to my Children), but if we were to start investing in precious metal now then we should look at buying Silver or Platinum as they are down in contrast to Gold, and make a good purchase now.