Opinion split on gold price direction

With inflation at a new high, investors move towards gold, traditionally seen as a hedge against inflation.

With inflation at a new high, investors move towards gold, traditionally seen as a hedge against inflation. But today, experts are divided over movement of gold prices in view of the bouncing back of crude oil. One school of thought says that the existing high crude oil prices at about 64 per barrel would put pressure on gold prices to move up. The other school of thought believes that it will not have much impact on gold prices.

Those favouring rising gold prices point out that historically, there is a direct relation between the price of gold and that of crude oil. Over the past 60 years, one ounce of gold has had the purchasing power of about 15.2 barrels of oil. However, with the ever-increasing price of oil, currently standing at 64 per barrel as on April 5, 2007, the same amount of gold buys 10.5 barrels 673.30 as on April 5, 2007.

According to S P Sharma, an economist with a leading consulting firm, 8220;The price of crude oil is unlikely to decline below 60 in the near future. Therefore, the price of gold is likely to rally in the coming months. Historical data shows that when the crude/ gold ratio falls below 11, where one ounce of gold buys 11 barrels of oil, the ratio not only has come back in line with the average but that conjecture drives the ratio above the historical average of 15.2.8221;

Even if the price of crude oil falls to 60 per barrel, gold prices would appreciate, says Sharma. If the average ratio of 15.2 barrels of oil per ounce of gold is considered, the price of gold will move from 673 per ounce to 900. In case the ratio moves above 15.2 in the coming years, the price could touch 1,000 per ounce, he says.

The other reason for warming up of the gold market is trading of the metal as Exchange Traded Fund ETF in India, that begun last month. Now gold can be purchased just like a regular stock. This is an indication that investors are warming up to the idea of buying gold. The issue price of the Gold Benchmark Exchange Trade Scheme, which listed on March 19 and whose issue price ranged between Rs 950 and Rs 960, closed at Rs 946 on April 4, 2007.

However, the creator of the fund, Benchmark Mutual Funds executive director Rajan Mehta, is neutral on price trends. 8220;Gold prices are appreciating in terms of the dollar,8221; he says. 8220;But it is not making a big difference in terms of rupees. We cannot forecast whether gold prices would go up or down. But one thing is sure 8212; that it would range between 625-700 in the coming days.8221;

According to former Gems and Jewellery Export Promotion Council president Sanjay Kothari, 8220;The demand for gold is more than its supply. About two years ago, gold and crude prices were going in opposite directions. But during the past one year, we are witnessing these moving in the same direction.8221;