Rural demand for gold may be sustained

By Ramnath Subbu

MUMBAI, SEPT. 1. The old adage of gold being `a store of value' and a `hedge against inflation' is no longer recognised internationally with gold prices having reacted from the glory levels of $850 per troy ounce more than a decade ago to current levels of $260. India, however, seems to challenge this trend with the lust for the yellow metal continuing unabated.

For a few years running, India is the world's largest consumer of gold and World Gold Council (WGC) figures indicate that the country consumed 850 tonnes of the yellow metal in 2000.

Gold demand in India in the second quarter of 2001 reached 235.8 tonnes, up 7 per cent than the year earlier thus establishing a second quarter record, according to Gold demand trends - second quarter highlights, a report released by the WGC.

Together with revised data for the first quarter, demand for the first half was 17 per cent higher at 490.4 tonnes than the relatively weak first half of 2000.

Following the reduction in import duty from Rs. 400 to Rs. 250 per 10 gm announced in February, unofficial imports fell sharply with more gold being channelled through official routes.

In the second quarter, official imports were 33 per cent higher at 177.2 tonnes than a year earlier with unofficial imports falling to around one third of year-ago levels. For the six months as a whole, official imports were 34 per cent higher at 359.3 tonnes than in the first half of 2000.

Demand for the second quarter, like that for the first three months of the year, was initially boosted by a substantial number of marriages and other festivals. This contrasted with the experience in the year 2000. For the rest of the quarter, growth in demand compared with a year earlier was less buoyant as factors such as the effect of the fall in the stock market on urban incomes and the aftermath of the Gujarat earthquake, according to the WGC report.

With signs of a good monsoon, it is expected that demand from the rural sector would increase in the last quarter of the year. ``In India, there has been a significant increase in consumption after the crisis following the US-64 debacle," said Mr. Dinesh Parikh, a bullion analyst.

Rural offtake for gold constitutes between 60-70 per cent of demand and a large part of this goes into manufacture of traditional jewellery. Rural incomes depend almost wholly on agriculture and this is where monsoon plays an important part.

In spite of the cheerful prognosis, in the last decade, gold prices have not really moved up enough to justify their being a hedge against inflation. In fact, gold prices a decade ago were ruling at around Rs. 3,450 per 10 gm and are currently around Rs. 4,450.

This rise occurred even as global prices of gold plummeted. For this phenomenon, the depreciating rupee is largely responsible as a falling domestic currency pushes gold prices higher even amidst stagnant international prices.

Internationally, gold prices have been buoyant since April and even in the last one month, gold scaled a peak of $280 per ounce and is now around $273 level.

The recovery could be attributed to a number of factors - the most important being falling U.S. interest rates and from relatively high gold borrowing costs (lease rates) which has reduced the attractiveness of forward selling, particularly at prices near $260 and below.

On the other hand, there is still insufficient buying demand and the prospect for increased central bank selling and forward selling from producers at higher U.S. dollar price levels. Bank of England has auctioned 25 tonnes of gold 11 times and has completed its twelfth auction of 20 tonnes. The next auction of 20 tonnes is expected to take place soon.

According to Mr. Parikh, ``The dollar has been weakening vis-a- vis the Euro, franc and other currencies. Also, the U.S. interest rate cuts - seven in 2001 alone to boost the economy has not helped and the economy continues to be in recession. The U.S. government has also waived the import duty of 6.5 per cent on gold jewellery which will have a beneficial impact for Indian exports.''

Historically, the U.S. dollar moves in inverse proportion to gold prices - a weak U.S. dollar leads to gold prices going up and vice versa.

``Last year, gold stock in the Comex (New York market) was at 16,00,000 tonnes but this year to date, it has come down to around 870,000 tonnes. Now if there is some demand and with a low stock, speculators could push up prices. International analysts and chartists have predicted gold to move in the $280-350 band for the rest of the year so prices could go up significantly.'' said the bullion analyst.

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