Gold has turned into an attractive investment option in the aftermath of delivering a spectacular rate of return last year. The investment demand for the yellow metal has been growing at a fast clip in countries like India and China. So, is the gold market overheated? K P Padmakumar, executive director, Muthoot Finance Ltd, does not think so. However, he is of the view that investors shouldn’t put all their eggs in one basket.

Padmakumar, former chairman of Federal Bank and a former fund manager of SBI Fund Management, spoke to ET about the factors that triggered the gold price boom, apart from providing new insights to understand the price behaviour. Apart from the higher demand from India and China, the two leading Asian economies, pronounced signs of structural weakness in Europe, even in countries like Italy and France, have fuelled the gold price rally. The unemployment rate in the US is still uncomfortably high and the economy is still not out of recession. The structural weakness of these economies has weakened the position of the dollar as a reserve currency. All these factors have pushed up the price of gold, says Padmakumar.

“On the other hand, the supply of gold is static. No new mines are being added, making the cost of prospecting for gold prohibitively high. The increasing production cost, on the one hand, and the growing demand, on the other, have contributed to this price rise. Interestingly, China might soon overtake India in terms of private gold consumption.” With prices and demand at a high, isn’t the gold market getting overheated? Padmakumar doesn’t think so. After taking cognisance of the factors that have triggered the price rise, he opines that gold as a market is not yet overheated.

There are many reasons for taking such a view. The structural weakness of many economies in the West is still a cause for worry. The debt-to-GDP ratio is worsening in many of these countries. And though the position of the dollar has weakened, there are no signs of an alternative reserve currency in the near term. “All these factors point to the primacy of gold as a preferred asset class. As a result, a precipitous fall in gold prices may not happen in the short to medium term. However, since speculative demand for the commodity has increased, temporary ups and downs will happen, as is being demonstrated in the recent weeks.

But the underlying trend will show an upward movement in prices as the structural asymmetries in leading economies in the world are still at large. Gold prices stood at $800 per troy ounce in 1980. The price, after adjusting for inflation, should be around $2,400 per troy ounce at present. Going by the present trend, this price is likely to be discovered by the middle of next year,” he says. – Source: http://economictimes.indiatimes.com