Cheers to the much-awaited gold price plunge

The yellow metal described once by the celebrated economist John Maynard Keynes as a relic of the barbarian era has seldom failed to fascinate aficionados and critics alike with its price fluctuations. It is not surprising that in the present global context with a few positives surfacing to give a leg-up to the global economy and ending the extraordinarily long phase of ultra low interest rates in advanced countries, gold prices have plunged. 

Early last week, global gold prices plummeted to their nadir in more than five years. The price declined by four per cent to as low as $1088 an ounce in Asian trade — the lowest since March 2010. Investors turned to the US dollar, which rose on the possibility of the Federal Reserve raising interest rates in a stronger US economy. The first sign of tightening of US monetary policy since 2006 and the retreat of negative yields in the eurozone are reasons enough for gold prices to tumble.

Interestingly, the price plunge occurred despite the Middle Kingdom, the world’s biggest consumer, announcing on July 17 that its gold reserves were up 57 per cent at the end of June, compared with the last time it disclosed reserve figures in 2009. Still, gold now accounts for 1.65 per cent of China’s total foreign exchange reserves, compared with 1.8 per cent in June 2009, in spite of the increase in tonnage.     

For India, the price fall has not come a day too soon. In the wake of a mini balance of payments crisis partly triggered by an inordinate spurt in gold imports in the erstwhile UPA government’s second tenure, in 2013, the authorities had to raise the import duty thrice in that year. And link imports to re-exports to contain the deficit and the fall in the rupee value. The steps helped pare down the deficit to $32.4 billion in 2013-14 from $87.8 billion the previous year, according to the Reserve Bank of India. The government allowed more agencies to import gold in May and scrapped the 20:80 rule requiring importers to sell 20 per cent of their purchases to jewellers for re-export in November, 2014. These measures kindled hope that the government might lower the duty. 

The All India Gems & Jewellery Trade Federation, which had urged the government to cut the tariff to 2 per cent, said on Feb 28, 2015 that the industry felt let down by Arun Jaitley’s decision to retain the tax. But the savvy finance minister stuck to the duty not merely to fill the coffers but also to put paid to reckless import of the yellow metal so that the die-hard hoarders would find the going tough and expensive to sustain. 

India has also replaced China as the biggest buyer of the metal last year, reclaiming the position it last held in 2012, after the jewellery demand leapt to the highest level since 1995, according to the World Gold Council.

India’s total demand in 2014 was 842.7 tonnes, 14 per cent lower than the previous year, while China’s sank 38 per cent to 813.6 tonnes, it said.

The pernicious fallout of high import duty on gold is that smuggling supervened on a larger scale than ever before. About 200 tonnes of gold were smuggled in 2014, after controls drove premiums paid by jewellers to as much as $160 an ounce over the London cash price, the bullion industry contended.

 In a move designed to wean people away from putting their savings on inert metals like gold, the 2015-16 full-fledged NDA budget proposed a plan to monetise domestic gold that allows depositors to earn interest in their metal accounts and jewellers to receive loans against such deposits. It was also proposed to offer sovereign gold bonds to investors as an alternative to bullion with the bonds bearing fixed rate of interest that are redeemable in cash at the face value of the metal. How far this tack will succeed relies on how fast the sentimental hold of gold on people is systematically disabused by campaigns and strategies.

The author is freelance economic journalist based in New Delhi