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LATEST NEWS UPDATES | Shining Bright by Manav Chopra

Shining Bright by Manav Chopra

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published Published on Dec 22, 2009   modified Modified on Dec 22, 2009

The new joke on Dalal street is that gold prices are soaring, not because of increased demand in the US, India and China, but because Shilpa Shetty has bought half the gold in India for her wedding dress! Jokes apart, the yellow metal has hit headlines recently because of its spectacular rise.

Prices have spiked as investors now prefer gold to the weakening US dollar. The US economy has lurched from one disaster to the next — the Iraq war, the auto industry meltdown, the sub-prime crisis, and subsequently, the credit crunch.

The greenback rose to pre-eminence during the middle of the 20th century, in the Breton Woods era where it was the central currency, linked to gold. In 1971, the dollar was decoupled from gold, but its economic dominance remained. It was deemed the preeminent reserve and trading currency.

Now, stricken with 10 percent unemployment, a mammoth budget deficit, spiralling mortgage and credit card defaults, and toxic assets on its books, countries are losing confidence in the dollar. “By exchanging dollars for gold, countries are expressing this loss in confidence,” says Anjani Sinha of MCX, the multi-commodity exchange that trades in precious metals.

Since 2001, the dollar has declined 40 percent in value, almost 16 percent in the past year. During the same time, the price of gold has soared from $250 to $1100 per ounce. And, currently, from a 52-week low of $713 per ounce on November 13, 2008, it’s risen to almost $1,153 on November 18, 2009, a jump of almost 62 percent.

However, gold prices are rising mainly because of worldwide demand from investors, retail or central banks, not from physical demand. Excluding China, where national physical demand grew by 11 percent, worldwide it declined by 18 percent in Q2 2009.

In 2008, gold demand for the purpose of jewellery and industrial needs fell by nine and six percent, dropping further to 22 and 26 percent by the first half of 2009. Conversely, retail investment demand in gold has grown a whopping 72 percent in 2008 and 22 percent in the first half of 2009. Moreover, Exchange Traded Funds (ETFs) and similar products that invest in gold have soared by 321 percent in 2008, and up to 580 percent by the first half of 2009.

India too has contributed to this price rise: recently, the IMF offered 403 tonnes of gold to the market to acquire cash. India mopped up almost 200 tonnes at $6.7 billion. In one transaction, gold’s share in the country’s total reserves jumped from 4.6 percent to 6 percent. 

However, Indian investment in products such as ETFs and retail investments is not high. ETFs are a paltry 1 percent (7-8 tonnes), compared to the physical demand of 700-800 tonnes. Retail investment in India has not significantly contributed to the price rise in gold. And though India has high physical demand, it’s dwindling because of the price rise. Delhi-based jewellery designer Alpna Gujral says, “Although wedding buying has not slowed down in India, sentiment is cautious. People are waiting to see what will happen to the price. Jewellers are able to sell old stocks priced at old gold prices. Newer pieces at current prices are not selling.”

Transactions like the RBI purchase, coupled with increasing demand from investors, reluctance on the part of central banks to sell and an impending inflationary scenario are causing a price rise. But, while investors could gain from investing in ETFs or gold indexes, for jewellery manufacturers, high prices have taken the sheen off demand.


The Tehelka Magazine, 4 December, 2009, http://tehelka.com/story_main43.asp?filename=Ws121209gold.asp
 

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