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Investors in India Switch to Gold Due to Inflation

Release Date: 
Friday, November 11, 2011

Investors in India are withdrawing from government bonds and national savings plans to invest record amounts in gold. Gold moved higher on expectations that new governments being formed in Italy and Greece will quickly adopt austerity measures to combat their debt crises.

Indian investors moving to gold as a hedge against inflation rates, which have risen above 9 percent since December. "Inflation is running ahead of bank deposit rates," Ritesh Jain, the Mumbai-based head of investment at Canara Robeco Asset Management Ltd., which oversees about $1.75 billion. "People are seeing the value of their money eroding. There is still enough juice in gold to continue to attract investment."

India's combined imports of gold and silver rose 40 percent in October from a year earlier, said Indian Trade Secretary Rahul Khullar, attributing the increase to "asset switching."

The Eurozone debt crisis and lower euro are expected to boost gold prices next year. "Ultimately we're going to move higher early next year. We're going to test $2,000 an ounce," said Standard Bank analyst Walter de Wet, while also noting a current pickup in risk appetite. "The European Central Bank will have to create more money to assist the debt burden in Europe and that will be good for gold."

Former European Commissioner Mario Monti is the current favorite to replace Prime Minister Silvio Berlusconi. "It is still unclear whether a new government in Italy will be able to successfully consolidate its budget without external help. Gold should therefore continue to profit from the persisting high uncertainty," said Commerzbank in a note. Unlike Greece, Italy's economy, the third largest in Europe, is considered to be too large for the region to bail out.

"The list of problems in Europe is growing faster than the possible solutions," said David Christensen, who oversees $650 million as chief executive officer at San Francisco-based firm ASA Ltd. "That's adding more fuel toward gold being added as a safe haven. Institutional investors and central banks are all adding gold to their portfolios."

(Sources: "Investors Fleeing Bonds, Savings Spur Record Flows Into Gold: India Credit," Bloomberg, November 11, 2011; "Gold Edges Higher after an Earlier Dip," CNBC, November 11, 2011)

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