Gold Corner November  2008 Overview Gold prices have been on a corrective mode since October as liquidity pressure outweighs the bullish fundamentals. The impact of recessionary environment has been much more severe than anticipated. Equity indices have seen one of the worst falls despite mouth watering valuation as value investors are still refraining from catching the falling knife. The TED spreads and the credit spreads have been at unbelievably high levels indicating lack of trust between major players in financial markets. The data released have been indicating that the markets have been deteriorating and there are no signs of improvements as yet. Though lower commodity prices have eased the pressure on inflation, it has failed to have a positive impact on deteriorating economic outlook. US dollar has been appreciating against other major currencies despite weakness exhibited by the US economy as other major economies are even worse off. Regulatory authorizes around the world have been trying hard to reverse the effect of global financial meltdown. Many major financial institutions have been nationalized in US, Germany, UK among many others. National treasuries around the world have been on a run to provide liquidity into the system to easy of the liquidity pressure. We have seen coordinated rate cuts by major central banks including Fed, ECB and BoE among others followed by further easing as required. Regulators have also been buying commercial paper to inject liquidity and confidence in the financial market. Few of them have been guarantying bank debts and have been giving positive statements to induce confidence in the system. Regulatory authorities around the world are willing to take the most drastic steps to undo the damage as we have never envisaged such a haunting scenario before. As a result interbank rates and commercial paper rates have fallen, spreads have narrowed, credit availability has increased and liquidity pressure have eased a little, however we are far away from a robust and confident financial system. Indian regulators have also been fighting hard against bearish market forces to restore liquidity and confidence in Indian markets. They have sliced down CRR in different tranches along with repo rate and SLR cuts. They have raised ECB caps for infrastructure companies and also lifted curbs on P-Notes. They also provided special liquidity to banks and mutual funds. Though midterm monetary policy review confused many as it kept rates unaltered they announced rates cuts next week and seems willing to take all the necessary steps as and when required. Global market meltdown has lead to demand destruction in various commodities and have push prices lower. Lower industrial productivity, plant shutdowns, increase in unemployment rates etc has resulted in demand destruction for commodities. Another major reason for fall in commodity prices is appreciating dollar as appreciating dollar makes the dollar denominated commodities expensive for non-US investors and hence reduces the commodity demand. Inflation in India has returned to single digit growth after five months to 8.98% thanks to lower industrial oil, commodity and food prices. Domestic demand for gold had been reasonably good during the festival season. Demand for gold has been higher in non-metro cities especially rural India as such investors are less likely to be affected be equity market meltdown. Strong demand seems to erupt at lower levels providing strong support to gold prices. Gold and Silver has been trading at a huge premium as overseas suppliers have curtained supply of gold to Indian markets in order to reduce their exposure to India markets. Again European central banks have reduced their gold sales and the central banks from emerging markets are looking forward to increase their reserves in gold and diversify away from currency exposure. If central banks increase their exposure in gold then demand would outstrip supply and spike up gold prices. Outlook Gold prices have corrected lower towards 720$/Oz after reaching a high of around 931.95$/Oz and making a low of around 682.41$/Oz. Technically strong supports are expected at 700$/Oz, 677$/Oz and 650$/Oz and resistance are expected at 770$/Oz, 840$/Oz and 920$/Oz. Given the present financial turmoil, the trading and investment books of many financial player are in red and they were forced to liquidate their position in gold and book the MTM profits to improve their trading performance. Liquidity pressure along with negative sentiments and weak technicals has been outweighing the bullish fundamentals for gold. However gold prices are expected to rebound strongly on the back of strong fundamentals. Deteriorating economic condition, expansionary monetary stance, expanding balance sheet and lack of confidence over financial systems makes a good case for higher gold prices. Gold is given a safe haven status and is believed to have very low correlation with other asset classes. Hence when liquidity pressure eases gold would be one of the major beneficiaries. Long term prudent investors should increase their exposure in gold to safeguard themselves from financial turmoil. Current low gold prices are attractive to many and hence gold prices are well supported at current levels. By : Mr. Hiren Chandaria - Fund Manager, Reliance Gold ETF * Disclaimer The information contained herein is the independent and personal view of the author and should not be construed as an investment advise or a standard investment procedure and are not the views of the Company. Neither the AMC, the Trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the authenticity of such information.