MUTUAL FUNDS

In the light of macro events, gold appears to remain favorable, as an effective portfolio diversifier<
08-Jun-12   11:26 Hrs IST

Mr.Chirag Mehta
What's your outlook on gold?

Though there have been short-term volatilities on account of a multitude of factors operating currently; the economic and financial background continues to be positive for the yellow metal. It's been challenging times for the yellow metal as the dollar strengthens since the focus remains on Eurozone worries. At the end of the month (May) and moving into June, as expected we have seen gold show signs of strength as Euro zone crisis aggravates and the increasingly possibility of further monetary easing looms large. Global gold exchange traded products holdings have largely remained steady despite the corrective phase signaling that long term investors are still worried about the macro economic scenario as well as the issues surrounding currency debasement and still prefer gold as an effective portfolio diversification tool. Such signs of strength in gold are indeed encouraging for such gold investors.

With tensions in the Eurozone resurfacing, uncertainty is coming back. This is helping to build a good foundation. In Europe, for instance, Spain is becoming a real worry and it's much larger than Greece. The political developments in the Euro zone countries may aggravate the crisis further. Communication from the Federal reserve that they still have all the options open in case economy deteriorates further when viewed along with the recent weakness in economic data leads to an increasing probability of further easing measures which have helped gold move higher since the after math of crisis in 2008. If Europe also finds its solution in the form of bailing out beleaguered nations by ECB money creation exercise then it will highly aggravate the currency debasement issues and would possibly help gold strengthen even further.

The global economy is shrouded in various uncertainties. The long term issues of rising deficits and debts are still in want of some meaningful resolution. The western world is still grappling with a massive and unrealistic heap of sovereign debt. These high levels of debt, combined with slow economic growth have compelled central banks around the world to print more dollars (and other currencies), stimulate the economy and inflate away the debt burden with an intentional plan of currency devaluation.

In the light of these macro events, gold appears to remain favorable, as an effective portfolio diversifier.

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