India gold purchase: could end use be insurance ?

Gold prices continue to rise. On Friday, gold surged past US$ 800 per ounce in New York. Factors supporting rise in gold prices include:

• Rising oil prices
• Financial worries in the US
• Inflation concerns
• Weakness in US dollar
• Geopolitical concerns
• Potential shortage of physical supplies to back paper traded gold
• Continuing physical demand from countries like India.

Despite this rise, prices have not reached the peak reached in 1980 (US$ 850 per ounce on 21 January 1980). However, some market analysts now feel that gold could test these levels. Newmont Mining Corp predicted, two years ago, that gold prices could touch US$ 1000 per ounce !

On the other hand, some technical analysts suggest that gold is in an overbought position and could weaken should US dollar strengthen. Supports are at US$ 802, 797 and 785. Resistances are at US$ 823, 850 868.

If your risk appetite is low and are buying gold this Diwali season (whether resident Indians or NRI), you may be better off buying it for end-use where you can handle volatility as opposed to buying it purely for speculation. If prices continue to go up, the end-use nature would lock in notional profits, but if prices were to fall, the longer term holding nature of end-use may act as insurance against value loss.

People who have the stomach may opt to continue trading based on macro economic situation and technicals – however, as always, this will require keeping a close eye on gold markets to ensure that proper loss protection devices are put in place.