MUMBAI: Last year’s 25% gain in gold prices, even as other asset classes showed a decline in returns, could extend further in 2009. The risk aversion which helped the yellow metal remain the most preferred asset, after cash, in last one and a half year, now seems fading. However, the decline in US dollar is expected to support the gains in gold. Since September 2008, after the debacle of Lehman Brothers and the subsequent meltdown in global financial markets, gold as well as the dollar started to rise as the risk appetite of investors shrank. While rising number of banks came under severe liquidity pressure, a line of gloomy data releases made it clear that the world economy is entering into a recession. The liquidity crunch made gold, as well the dollar, preferred holdings among investors as well as traders. This explains a 32% rise in gold prices since September 2008 till February 2009 while the dollar index, a benchmark of greenback’s strength against a basket of currencies-gained 15% in the period. This was a rare development as historically the two maintained a strong negative correlation of the order of 80%. However since early March 2009, there has been a change in this scenario. Since a couple of positive US data started to flow in while world equity markets started to rebound, the liquidity crunch started to ease. This development can be reflected by a fall in the overnight LIBOR (London Interbank Offer Rate) to 0.27% which moved as high as 6.87% in September 2008. Since this juncture, the dollar started to lose its strong hold while gold also felt a hitch of the fading risk aversion. The yellow metal felt bouts of decline in early March 2009, which caused it to lose nearly 10% till early April. However, since Mid-April 2009, the precious metal is on ascend again, on the back of renewed weakness in the Dollar. This was besides rising equity markets, with which gold holds a strong negative correlation. Rising confidence among investors as few US data releases (durable goods, ISM manufacturing index, consumer confidence, new home sales) showed better than expected figures in recent past, has caused a move away from Dollar and towards other higher yielding currencies. Gold is thus riding on the wave of dollar weakness even as the risk appetite of investors seems rising. International spot gold currently trading at $985 an ounce has on this backdrop gained more than 7% in last ten days. Domestic prices as reflected by the June future on Multi Commodity Exchange (MCX) have gained more than 5% and currently stand near Rs 14900 per 10 gm. The rise in domestic prices was affected by the appreciation in the Indian rupee which also rose by 3% against the dollar in the time period.

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