In last few years we have seen gold price rally as never seen before. In last five years the gold price has risen from Rs 1000/gram to Rs 3000/gram. BASEL banking group has recently taken a decision which is most likely to push gold prices further up. So if you were expecting that the gold bull run is about to die, have reality check as BASEL banking group is looking other way.
There are some basic rule book changes that BASEL banking group has taken that will lift gold prices even higher. BASEL banking is a group of central banks of all major countries like United States, Germany, France, China, United Kingdom, India etc. Central banks of the world control the monetary policies of their country and BASEL banking group has decided to form a committee among themselves that can integrate them to take decisions which is beneficial for all countries. BASEL banking group has decided to mark gold as a Tier-1 asset. So, how in the world this makes a difference to gold price? All banks are required to maintain a minimum capital adequacy ratio (CAR). In order to increase the capital adequacy ratio banks must increase their proportion of Tier-1 assets. The higher the capital adequacy ratio the safer the bank is considered.
In earlier days gold was treated as Tier-III asset but now as it is Tier-1 asset for banks means its demand is bound to increase. Banks will buy more gold to maintain or better its capital adequacy ratio. This rule of Gold being Tier-1 asset will become applicable from Jan 2013, so after this date I have little doubt that gold price is going to see a major jump in demand. This jump in demand will not be sudden as banks will prefer to increase their fold reserves gradually over a period of time. As central banks all over the world is going to increase their gold reserves this is certainly going to push gold prices in 2013.
I personally feel that at this moment of time it will be only wise to include gold in our investment portfolio.