Gold continues to exhilarate — that’s perplexing many

The World Gold Council believes that Indians will continue to support gold. It believes demand in the country, which stood at 963 tonne in 2010, will exceed 1200 tonne by 2020, amounting to a whopping Rs2.5 lakh crore at current prices.

Already, India is reckoned to have the largest gold holdings — in private hands.

In terms of official gold holdings, though, India pales before the US. As of this month, the US held 8,133.5 tonne, compared with just 557.7 tonne for India.

“Indian gold demand has grown 25% despite a 400% rise in the value of the rupee in the last decade. Newly published research from the World Gold Council (WGC) reaffirms India as a key driver of global gold demand, with an expected increase by over 30% in real terms,” says a WGC newsletter.

It also recognises that almost 32% of the global demand for gold is from India, followed by China (20%).

Ironically, India’s hunger for gold comes as the Western and European markets are seeing an increase in gold selling (as scrap or recycled gold). Some believe that recessionary conditions in these markets have compelled many owners of gold to sell the precious metal for cash, leading to gold sales exceeding gold purchases.

So, are Indians foolishly setting store by a metal that the West has learnt to do without?

“Hard to say,” says Sanjiv Arole, an independent bullion analyst.

“The demand for fresh gold from India has been growing. Gross import of gold stood at around 1,000 tonne last year, and the trend does not appear to be slowing.”

Commodity investment advisors like Bhargav Vaidya point out that much of the demand is on account of investment in bars and coins.

“It was a bit less than 200 tonne in 2009 for India. It jumped to 350 tonne in 2010. And in the first quarter of this year, it has already crossed 90 tonne,” said another analyst, requesting anonymity.
Suddenly, nobody seems sure gold is worth investing in. As George Soros once said, “Gold is the ultimate bubble.”

The big difference between India’s purchases in the past and in recent years is the reduction in purchase of jewellery, and increase in bar and coin purchases.  

Effectively, purchasers save on adulteration and the money lost in ‘making charges’. But then, this gold could also be sold overnight, should the market conditions turn adverse. The trigger could be a continued increase in mining output, or reduced purchases by central banks.

Yet, it is also true that, in the face of a rapidly eroding US dollar, and with little faith in any other currency or commodity, gold is the only safe haven right now.

One more factor worries marketmen.

“There has been a great deal of short covering in gold,” says a commodity trader.

At each decline in prices, these traders purchase gold to cover up their positions. Moreover, with gold scrap sales more than double their 2005 levels, there are clear indications of selling pressure as well.

“But that is because of poor economic conditions, where customers trade gold for cash at these attractive levels,” said Arole.

None of these indicators give out a clear signal. The markets remain skittish. But gold advertising remains at an all-time high. After all, the survival of high gold prices depends on India, and may be China.