PICTURE SPEAK

GLOW AND GROW: Experts don’t expect gold prices to fall soon

Whether or not jewellery-owners are aware of this, jewellery-buyers certainly are. At the height of the current wedding season, jewellers around the country were busy redesigning their collections to make the heavy, ornamental pieces lighter, so that their clients wouldn't overshoot their budgets. But don't imagine that higher prices shortened the queues to buy gold; last year, India had to import 750 tonne of mined gold to meet the ever-growing demand, up 100 tonne from 2004. The World Gold Council doesn't expect a dramatic change this year.

Here's why. Indians, who have always believed in investing in gold-confident of its intrinsic value-will probably keep buying, lured by the serious promise of the metal's going past the Rs 12,000-per-10 gm mark by the end of the year. Unlike in the case of other assets, gold is purchased by both investors and consumers-the former for appreciation and the latter for pleasure. Today, both kinds are active, in India and around the world. And while gold prices have usually had little to do with those of stocks, government bonds or real estate, this time the upward trend is in tandem with an ever-growing appetite for base metals. Driven by growing industrial demand from India and China, prices of copper, zinc and steel have been zooming over the past two years. Thus, over the past 12 months, gold has appreciated by 45 per cent-and that's a distant third to first-placed copper (116 per cent) and silver (78 per cent).

Anyone who managed to buy at the right time can thank the reversing of the commodity cycle from the slump it had gone into, mirroring the world economy after 9/11. Adding fuel to that fire now is, paradoxically, the rising price of oil, which touched $75 a barrel in the futures market last week and could be headed for the dreaded $100 mark. With the oil-hungry manufacturing economies of India and China in particular demanding more, oil prices haven't dropped after winter, as they used to. As Kishore Narne, assistant vice-president (commodity research), Anand Rathi Securities, points out, "High oil prices generally have an inflationary effect on economies and this leads to currencies losing value."

It sure does. The dollar, for instance, has been devalued by 3 per cent in the past year even though the inflationary effect has been controlled by the Federal Reserve in the US by increasing the interest rates. But since no major oilfield has been discovered for decades, and since increasing oil output is a costly and long drawn-out process, oil prices won't drop anytime soon. And Central bankers can't keep the resultant rise in inflation at bay for long by tinkering with money supply. So, a further drop in currencies like the dollar and the euro is inevitable, forcing wise global investors to move their money out of dollar-denominated instruments like government bonds and securities and into-you guessed it -gold. What, they reason, can be a better hedge against inflation?

As gold grows glitzier, a whole new bunch of investors has jumped in, too. Last year, the World Gold Council launched an investment product called the gold exchange traded fund-a mutual fund where the underlying asset of each unit is one-tenth of an ounce of gold. Says Sanjeev Agarwal, managing director, World Gold Council India: "Since the launch of the fund in London and New York, gold mutual funds have collectively acquired 500 tonne of gold." Alongside, individuals are not just buying jewellery, gold bars and gold coins, they're even investing in a demat form of gold through commodity exchanges like MCX and NCDEX. Investors can also simply buy gold futures-a bet on the future price of gold-paying only a margin of 4 per cent upfront. Not only is that increasing the quantum of purchases-thus driving up prices-it's also safer, eliminating fears of burglaries or bank robberies. In fact, these are also better from a tax perspective, as Narne points out, attracting as they do only short-term capital gains tax on trading gains, versus the additional wealth tax in case of jewellery or demat gold.

Clearly, there's no capping the demand. And when rising demand is met by shrinking supply, the outcome is a foregone conclusion. The world's leading producer of gold, South Africa, is producing less. In 2005, its output dropped to 300 tonne from 346 tonne the year before. Explains Raghavan Sundararajan, commodity analyst, Kotak Commodity Services, "This year's price hike was sparked off by AngloGold Ashanti's 2006 announcement that gold output would fall in 2006 and stabilise only in 2007."

So, despite a little bit of yo-yoing, gold prices seem unlikely to drop in the coming months. Admits Mehul Choksi, managing director, Gitanjali Group, "Economists are being forced to deal with the fact that, for the first time, all asset classes are rallying simultaneously." In plain terms, while equity prices and gold prices aren't linked, the fact that they're rising in tandem shouldn't be cause for concern for gold investors. Many buyers are betting that both will keep rising. And all that's gold will keep glittering.

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