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Record prices deter gold buying

Ramnath Subbu

Hedge funds buying leads rally in prices

GOLD RUSH? People thronged jewellery shops to make eleventh hour purchase of gold on the occasion of Akshaya Tritiya. — Photo: Raju V.

MUMBAI: From being regarded a dead investment some years ago, gold seems to be seeing heady days this year. Already this year, the yellow metal has gone up by more than 30 per cent in value reinforcing its reputation of being a hedge against inflation.

Last week, it crossed the Rs. 10,000-mark (10 gram) in the domestic market and also scaled a 25-year high of $685 an ounce in international markets.

All signs indicate that the bull-run on gold is not finished as yet.

The run has been led by huge buying by hedge funds exacerbated by the global geo-political situation, namely, the Iran-American nuclear issue, a weak dollar and continuing firmness in global crude oil prices.

Madhusudan Daga, bullion analyst and consultant, Goldfield Mineral Services, told The Hindu that "the future price of gold seems to point towards firmness although a correction could see prices react to around $670-level in the immediate future."

But on the other hand, gold mine owners have de-hedged their stocks and sold in forward. "Also, Russia has been buying gold and China is expected to enter the market to pick up gold soon,'' said Mr. Daga adding that, "in the longer term, we can expect a correction again at $700-level but prices will definitely head towards $800-level and further to the record $850-level as in the 1980s."

Sanjeev Agarwal, Managing Director, World Gold Council-Indian subcontinent, said, "jewellery demand has been pushed by the marriage season and there has been strong demand for gold bars and coins. Customers usually buy these to hedge their positions or use to make jewellery at a later stage."

There seems to have already been an impact of the prevailing high prices. Bakul Mehta, Chairman, Gems & Jewellery Export Promotion Council (GJEPC), said, "there has definitely been an impact on the offtake of jewellery.

The `Akshaya Trittiya' festival last week, when traditionally gold is purchased heavily throughout the country, saw markedly lower purchases in terms of volumes although in terms of units there was no significant drop. Considering the record prices, customers chose to buy lighter and lower grammage items.

Mr. Agarwal however, said that sales of leading jewellers have been largely unaffected although jewellers in smaller locations have been affected "due to a price-sensitive customer base."

"We would definitely revise our earlier estimates of 20-25 per cent growth in gold and jewellery demand this year. This year it will be more in the region of 15 per cent, although a more accurate estimate will be arrived at only later," said Mr. Mehta.

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