Gold or equity? It’s a tough call for investors in 2006

MUMBAI: With P Chidambaram’s budget out of the way, investment wizards are looking at gold as an investment alternative in 2006. While the bull run on the stock markets continues, most research houses have turned cautious on predictions, with the most bullish estimates not giving the Sensex headroom for growth beyond 10% over the next 12 months.

A comparison of analysts’ index projections over the next 12 months (see chart) shows that the Sensex’s gains may be capped at a maximum level of 11,600 (against last Friday’s close of 10,565); more bearish research analysts, like Citigroup’s, expect the index to correct to as low as 8,500.

In contrast, gold buffs are looking for the momentum to continue in 2006, expecting increases in the range of 5-16%.

Year-end projections range from a conservative Rs 8,600-8,700 per 10 gm, as estimated by Mukul Sonawala, president of the Bombay Bullion Association, to more bullish estimates of Rs 9,200-9,400 by Vijay Bhambwani, CEO of Bsplindia.com, and Rs 9,500 by Sunil Ramrakhiani, commodity head at IL&FS Investsmart.

The main reason for this optimism is soaring demand for gold as an investment vehicle. “Today, Indians are increasingly looking at gold as a tradable commodity because of its easy availability. While its use for adornment is likely to remain, it won’t be long before investment demand for gold catches up with jewellery demand,” says Bhambwani.

Bhambwani’s view is supported by a GFMS (Gold Fields Minerals Services) report on gold demand trends. The report reveals that in the last quarter of 2005, jewellery demand plunged 51% compared to 2004.

The report points to price volatility as the reason for the slump. However, the net retail investment demand remained less affected.

According to GFMS data, India’s net retail investment demand jumped by 35% to 135 tonnes in 2005 from 100 tonnes in 2004, while jewellery demand grew by 14% over last year to 589 tonnes from 518 tonnes. Overall gold demand for 2005 was up 17% in tonnage terms.

“The GFMS figures are a clear indication that the pace of gold demand for investment purposes is set to rise at a faster rate than jewellery from here onwards,” says Ramrakhiani of IL&FS.

Analysts say bullion traders took to the yellow metal last year because it offered a healthy return of 15-20%. It made better sense for them to trade in gold than convert it into jewellery, which offered lower margins due to weak demand.

Portfolio managers also advised investors to derisk their investments by taking exposures to gold.  Globally, the yellow metal has soared due to higher demand from hedge funds and sovereign investors.

NCDEX chief economist Madan Sabnavis feels it will take a while for gold to catch up with other investment avenues.

“Even though the government is taking steps to bring investment within the reach of retail investors by allowing funds to offer gold exchange-traded funds, it will take some time,” says Sabnavis.

But whether demand grows for holding gold as investment or ornament, no one’s doubting the demand itself. This means gold will offer strong competition to equity in 2006.