A silver lining over golden clouds

“All that glitters is gold.” Though antipodal of the famous Shakespearean tad, it fits pretty well in the context of gold in today’s times. While investors are wary of the equity market, gold is hell bent on breaking all historic price records. The yellow metal, which climbed to an all-time high of $1,421 on November 9, 2010 from $1,121.50 on January 4, 2010 (a whopping 26.70 per cent return over the last one year against 20.4 per cent by NASDAQ Composite), gained for the 12th year overall in 2010 as investors sought protection from weaker currencies, the European debt crisis as well as the resurgent inflation.

Even in India, which wasn’t affected by the global turmoil to the extent its western counterparts were, gold prices have taken a giant leap and touched Rs.20,016 (per 10 gms) on February 25, 2011 from Rs.16,650 on January 1, 2010 – a significant return of over 22 per cent in just one year and a phenomenal 88 per cent over the last three years (from Rs.10,658.75 on January 1, 2008). In fact, gold buying in the last one year has not yielded any losses. “This is primarily because the base cost of bullion can never become lower than its cost of production unlike in equity market. So, it’s always safe to invest in gold for long-term gains,” says Pritam Patnaik, VP, Kotak Commodities. Well, this might be the reason why, despite soaring prices of gold, consumers apparently still continue to buy this metal. But then, is it really viable to invest in the bullion at a time when global equity markets have started showing signs of revival and investors are looking for better returns on their investments rather than just capital protection?

If one goes by the latest report published by the World Gold Council, the demand for yellow metal in key markets has taken a dip in the face of higher price levels forcing people to turn towards other alternatives and the biggest beneficiary of this changing trend happens to be the “Poor man’s Gold – Silver”. Partly hauled by the gains in gold, globally and domestically, silver price has beaten all records and has risen sharply over the last one year, from Rs.27,100 per kg on January 1, 2010 to Rs.50,250 per kg on February 28, 2011 – a return of over 80 per cent. In fact, 2010 saw investors flocking to the metal not only as a commodity-play on economic recovery, but also as an investment vehicle with great returns. And if experts are to be believed, the demand for silver is only going to go up in the near future.

Agrees Prashant Sarawgi, Brand Director, Episode (a company which specialises in silver jewellery) as he says, “Given the fact that the prices of gold are on a rise, the usage of silver as an industrial metal has phenomenally increased over the last couple of years. Moreover, as we don’t recycle the metal, the industry is turning short of it and this is ultimately being reflected in its prices, which will continue to rise going forward.” For instance, the usage of gold in the dentistry sector in 2009 fell by 5 per cent y-o-y to 53 tonnes, at a time when the average annual gold price increased by 12 per cent y-o-y. Even Prithviraj Kothari, President, Bombay Bullion Associations agrees with Sarawgi avers, “If you look at the history of 3-4 years, you will realise that the usage of silver is on the higher side in comparison to any other commodity. Also, as it is a bi-product, therefore, its demand is escalating and so are the prices. In fact, in the coming 2-3 years, the price of silver is expected to touch Rs.1,00,000 per kg.” Thus, considering the increased attention that silver has been receiving coupled with short supply, one shouldn’t be surprised if silver imports for FY2010 go up over 20 per cent.

Further, to get out of the quagmire after the recession, countries like the US and the UK are now concentrating on the diversification and enhancement of their financial portfolio and as such are now buying solid assets like silver ETFs, which even on a conservative note are yielding 9-12 per cent returns annually. What’s more? The World Silver Survey 2010 too indicates the environment for silver investment to remain highly positive in the future given the prevailing economic uncertainty in the Euro zone.

So, has the yellow metal lost its sheen? Well, going forward, the investment demand for gold is no doubt going to be strong, but then people who have missed the bus, we think there is a little opportunity left for them to reap good returns in the short term. They will have to wait for a correction in gold prices before they invest in it and that too very clearly keeping the long-term view in mind. Further, not to forget, gold has never been a real wealth creator; rather, it has always acted as a wealth preserver. For instance, if you had invested Rs.100 in gold 20 years back, it would have fetched you Rs.387 today. However, the same amount would have garnered Rs.2,310 if it had been invested in stock market. And of course, our favourite Buffett considers this commodity amongst the most useless investments. Well Warren, we don’t invest in gold, and we still aren’t ‘bullion’aires!