The behaviour of various asset classes over the past six months, suggests that the markets are not sure about the global economic recovery. While the domestic equity market has remained somewhat trapped in a range, gold prices have showed a significant swing as it posted an all-time high in December 2009. Gold’s subsequent performance in 2010 indicates a further boost to its status as a store of value. The physical (or consumption demand) for the yellow metal slumped to multi-decade lows while the investment or speculative demand has increased. This makes for an interesting recipe while assessing the future outlook of gold price. The continued accumulation of gold by exchangetraded funds (ETFs) and bullion traders/investors, suggests that the price movement from here on will largely be driven by investors’ sentiment, which in turn, depends on the pace of the global economic recovery and inflation trajectory in key economies. Any sign of weakness in the global economy or the specter of run-away inflation could support a rally in gold and conversely, a better-than-expected economic growth or moderation in inflation will lead to a sell-off in the yellow metal. SAFE HAVEN Unlike other commodities, gold is regarded as a monetary asset since the precious metal’s physical consumption is restricted in jewellery making and to an extent some industrial applications. This uniqueness was more than apparent in the past two years when gold withstood the debacle in the equity markets and posted a y-o-y gain of 25% in 2008. Even if the usual negative correlation that the yellow metal shares with the equities has been put to test in this duration, the deviations were caused by margin requirement in the market plunge of 2008 and excess liquidity in 2009. Since the last quarter of 2009, there has been more than one development highlighting gold’s status of an alternative currency. In October 2009, CME (Chicago Mercantile Exchange) announced that the exchange will accept gold as collateral for trading. In the same month, the commodity made its intermediate high of $1098 per ounce when the Reserve Bank of India (RBI) bought 200 metric tonne of gold from IMF (International Monetary Fund). More recently in 2010 following the Greece debt debacle, the gold prices not only surged by 5% but also showed a divergence from the decline in Euro, a currency with which it generally maintains a positive correlation. FUNDAMENTAL SHIFT Even fundamentally gold demonstrated a striking new demand supply equation in 2009. The first dimension of this equation was a decline in the jewellery demand to its lowest level in nearly two decades. As can be seen from the chart, the jewellery demand, which on an average contributed nearly 70% of total consumption during 2002-2008, accounted for just half of the total gold demand in 2009.

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