Business

Gold glitters amid global financial chaos

Gold’s record run and its ability to hold its price amid the gloom and despair in the global financial markets has caught the attention of most harried investors. It is reasserting itself now as both an inflationary hedge and a store of value.

The yellow metal has stood virtually alone amid the rubble in the wake of the U.S. financial crisis. At present, ruling around $850-870 an ounce or Rs. 13,000 per 10 gram, gold is off its peak of $1,033 an ounce scaled on March 17 this year.

India is known for being a market where gold price volatility is as important as the outright price. The price instability encourages many consumers to adopt a ‘wait and see’ policy in purchase, reflected more in the jewellery trade’s reluctance to commit to high inventory.

Ajay Mitra, Managing Director, World Gold Council, Indian subcontinent, said “the consumer here has been waiting because he has a fixed budget and knows intrinsically buying gold is a good option. Given the auspicious period and lack of options he will continue to buy even at these rates.”

Mr. Mitra felt that it would be difficult to predict demand for the third quarter as people had postponed purchases by 7-8 months. The WGC figures for the second quarter ended June showed that high prices hampered Indian demand. In tonnage terms, jewellery demand was 47 per cent below last year levels and investment demand down 41 per cent although the second quarter of 2007 was a record for consumer demand.

In jewellery, gold demand amounted to 118 tonnes (223.1 tonnes in the year-ago period and an all-time high) and spending on gold jewellery declined 28 per cent to Rs. 14,170 crore.

The propensity to consume gold is based on expectations of an increase in price be it the speculator or the housewife and buying comes in when there is a perceived low, which is dramatically different from the Chinese mentality which is to buy ‘high’. So, in China, price volatility has little impact on gold purchases, said Mr. Mitra. The financial crisis in the U.S. will continue to have an impact on gold and its prices, said Sailesh Sangani, Managing Director, Priority Jewels. “Though we are entering the festive-marriage season, there will be gold buying but of much lower volume. I do not foresee any great pick-up in demand. Gold continues to hold on to its levels and even though it dipped about seven weeks ago to $780, it bounced back to the $900-level which shows that there is investment buying at dips.”

There has been a definite shift to gold from equities, said Shivram Kumar, Vice-President, WGC. “People are buying coins and bars ranging from 50 gram to one kg at every dip. When the price fell in the second half of August to $780, there was a tremendous rush, three to four times normal sales, so much so that retailers faced a shortage.”

According to Madhusudan Daga, consultant, CPM Group of the U.S., “I am very bullish about the prospects for gold and there continues to be good demand even at the prevailing high rates. Now marriage demand will come in with the festive season. Other investment options like real estate and equities have taken a hit on their values globally.”

Professional fund managers have been peddling other products such as mutual funds and equities to tap into disposable incomes. So, for a while, interest in gold dipped, however, typically when a financial crisis as the current one occurs, gold tends to resume its rightful place as the best inflationary hedge. “There is no financial product that can offer the stability or returns of gold and the primary reason to buy gold is intrinsically its investment value,” said Mr. Mitra.

Rural gold demand accounts for close to 60 per cent of the total demand in India. However, the 2-2.5 per cent growth rate in agriculture has impacted demand and consumption. Bodies such as WGC have tied up with companies, trying to offer products to the budgetary requirements of even the small and marginal farmers.

‘Gold Plus’ by the Tatas is a lightweight gold product as also schemes such as the gold deposit scheme with microfinance companies.

A pilot project with the Muthoot Pappachan Group for daily wage earners to put some of their money into buying gold is another. Mr. Mitra said the WGC was also in talks with some fast moving consumer goods (FMCG) companies to offer gold as part of a promotional scheme.

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