The Hindu : Zooming gold prices

Online edition of India's National Newspaper
Friday, Jan 17, 2003

Business

Business

Zooming gold prices

By Ramnath Subbu

MUMBAI JAN. 16. The core properties of gold as a low risk, reliable store of value, an excellent portfolio diversifier and an asset of last resort in times of uncertainty because of its high liquidity have been reasserted in 2002 and particularly in the last few months.

Gold, as investors know, is negatively correlated with most other asset classes. This means that when equities decline, there is an even greater tendency for gold to go up. It also proved to be the strongest major currency in 2002, outperforming the U.S. dollar by 25 per cent, the yen by 14 per cent, British pound sterling by 13 per cent, the euro by 9 per cent and the Swiss franc by 7 per cent, according to the World Gold Council.

Gold prices have been steadily increasing since April 2001 (from a low of around $256 an ounce). But in calendar 2002, it saw a rise of 23 per cent. From January 1 itself, when it was ruling at $278.35 to $302.65 on April 1, $312.3 on July 1, $322.6 on October 1 and closed the year at $342.57 on December 31, 2002. It has crossed the $350 an ounce threshold last week. In the domestic market itself, gold prices since December 1 have moved up from Rs. 5,225 (10 gm). to Rs. 5,700 level now.

Similarly, the ten-tola bar moved up from Rs. 61,100 on December 1 to Rs. 67,000 now.

The reasons for this, according to Hiroo Mirchandani, Associate Director-Jewellery (India), WGC, have been "continuous economic and due to political instability; the hesitant world economy, fall in stock prices exacerbated by concerns over corporate governance (Enron, and Worldcom), the weakening dollar and worries that it would fall further, falling interest rates (lowest interest rates in 40 years in the U.S.), economic concerns in Argentina, and Japan, political concerns after September 11 and the latest — the crisis in West Asia and North Korea. All factors came together in December taking the price up significantly". The price, according to WGC, was looking to consolidate between $345 and $355.

Further, Ms. Mirchandani said, "Hence, even if war fears subside, there will remain other uncertainty in the economic and political arena which could keep the underlying price movement in place".

According to the WGC, "There is clear evidence of speculators in the market as well as investors looking for value and for risk management and this is now generating a degree of caution in the expectation of profit taking. The panoply of uncertainties in the external environment, however, is underpinning the tone in the market as gold is once again sought after as an insurance policy".

In the domestic market too, demand is likely to pick up with the commencement of the wedding season. "In the domestic market, Makar Shankranti signals the onset of the wedding season and whether imported or from the domestic market, demand would continue for the next six months, up to July," said Dinesh Chandra Parikh, a bullion analyst.

"Earlier, domestic gold price movement depended much on the strength of the dollar," said Mr. Parikh. "However, now there are more determinants of its movement. These include, of course, the dollar movement but also the geopolitical situation and the fluctuations in the stock market," he added.

"The question really is how the demand will be met. It is usually met either through imports or recycling of gold," said Madhusudan Daga, a bullion analyst. "The demand is significant in smaller cities and here substantial recycling is taking place — up to 30-40 per cent of demand there is met from recycled gold which is not surprising. In fact, in June-July 2002, 90 per cent of the gold demand in Mumbai was being met through recycled gold".

It is therefore not surprising that given the current high prices, a significant part of the demand in the coming festive season could be met through recycling old jewellery. In the third quarter of 2002-03, India imported 87 tonnes against 96.4 tonnes in the second quarter. Mr. Parikh felt that due to the high prices, imports for the year could be lower by 30 per cent as compared to last year.

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