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Seeking refuge in gold

Gold closed above $1,000 a troy ounce on Friday (February 20), just three per cent below its all-time high of $1,030.80 reached last March. The rally in gold prices has been on for a considerable period of time. It is fed by a sustained demand for bullion at a time when most other asset classes, whether financial or physical, are shunned by risk-adverse investors. Equity markets around the world are in a moribund state with very little prospect of positive signs emerging o n the economic or corporate front to cheer them up in the near future. The deteriorating world economic outlook has heightened risk-aversion, with investors getting increasingly worried over the health of the global financial system. Despite substantial infusions of public money, most of the major international banks continue to be in a crisis. Nationalising some of them is increasingly seen as a way out. The much-heralded stimulus package of the Obama administration will take a while to work its way through but in the few weeks after the announcement it has not served to abate the deep pessimism that has gripped the developed economies. Until recently, apart from gold, the American dollar and the Japanese yen were considered safe investments at a time of fast spreading global crisis. However, with Japan’s economy reporting in the last quarter of 2008 one of its worst performances in recent years, the attraction of its currency has waned, prompting an even larger investment flow into bullion and the dollar. A few central banks are adding to their gold reserves.

India is the largest consumer of gold in the world, with most of the demand emanating from the jewellery sector. Recently, however, the high price of gold has deterred buyers and led to a surge in scrap supplies returning to the market. So far this year, imports of the metal have fallen to negligible levels. According to the World Gold Council, the total demand for global gold during October-December 2008 was up by 84 per cent (in tonnage terms) led by a strong demand from the jewellery sector. However, investment demand for gold is growing by the day. Even as banks sell gold in the form of bars and coins, investments in paper gold are becoming popular. Gold-backed exchange traded funds (ETFs) are recommended by fund managers as an alternative to equity-oriented mutual funds. Not surprisingly, most of them have delivered robust returns in contrast to the poor performance of equity funds. It seems a matter of time before paper gold, including gold futures, gained greater popularity and became more accessible to ordinary investors.

In "Seeking refuge in gold" (Editorial, February 25, 2009), a word in the first paragraph should have been risk-averse investors, and not risk-adverse.

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