Gold is close to achieving the rare feat of becoming the consistent performer among all asset classes of the decade. It has appreciated year after year for the last ten years. And this year, if prices end higher than that of last year, it will perhaps be one of the few assets to do so. It is already up 6.5% for the year till date in dollar terms. As an investor, perhaps one might ponder if having a bit of gold is a smart strategy. After all, it is only moving one way (that is, up) and even for the June quarter, when all commodities corrected, it moved up 11.5%—giving the best returns among all commodities.
So, should you invest heavily into gold at this juncture? Historically speaking, perhaps not. From a supply (mining) perspective, it should not be not more than $750 per ounce. The current cost of mining gold is around $350-400 per ounce. And gold mining companies have earned around 35-40%, which puts a figure of around $550-600 per ounce. Factoring in cost escalation, the long-term average should not be more than $650-750 per ounce over the long term. Of course, new investments into gold mines are coming at much higher costs, which justifies higher gold prices, but the rising demand seems to be ephemeral.
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Low jewellery demand: Interestingly, it is the investment-led demand that is spurring gold demand and not the jewellery demand. Jewellery demand in the past has constituted 60% of the overall annual demand of around 3,500-4,000 tonnes. But in 2009, it fell to 51%. Higher gold prices and its volatility are keeping jewellery buyers away. Perhaps at these prices, women in India and the Middle East are buying lesser and lesser. “It’s a lean period at present. We expect prices to be supportive post-Diwali and the demand to pick up during the marriage season in October to December,” said Amar Singh, head, commodity and currencies, business development & research, Aditya Birla Money. In the lean season of June-July, gold prices back home have already slipped to a three-month low.
