Still shining

Those who viewed the new central banks' gold sale agreement, upping the annual disposal cap from 400 tonnes to 500 tonnes, as a blow to the bullion's role as a global monetary tool, are in for disappointment.

The initial post-accord developments indicate that neither the significance of gold as an element of the global monetary reserves are likely to diminish, nor will its lure as jewellery fade.

Gold prices have remained more or less unfazed in post-pact bullion transactions in the European and other markets.

This is in sharp contrast to the immediate spurt in gold prices in 1999, when the original agreement was signed by 15 central banks to limit the sale of gold by them to a maximum of 2000 tonnes in the next five years.

The motive behind the accord then was to allay apprehensions over the central banks' intentions towards their gold reserves and the consequential uncertainty in the bullion market.

However, that kind of reaction has not been forthcoming on the renewal of the agreement, despite a 25 per cent increase in the sale limit, and there are several reasons for this.

For one thing, the new pact is to come into force only from September 2004, and not immediately. Second, the contents of the pact are in line with the expectations of the market.

Thus whatever impact the sale liberalisation was going to have had already been factored in. This apart, within hours of the signing of the new accord, Britain withdrew from it, stating categorically that it did not intend to sell any more gold during the period of the deal.

The Swiss national bank, too, was quick to declare that it had no plans to sell beyond the 130 tonnes already planned. Though an odd bank here or there, sitting on huge gold stocks, may wish to offload some of its inventories, the impact of this is unlikely to be very perceptible.

In any case, international gold prices are now influenced more by variations in the values of major currencies.

That is why, when the US dollar was weakening and the euro appreciating, institutional investors' keyed-up interest in gold pushed its international prices to a 15-year high of $ 430 per troy oz. on January 8. However, changes in currency values since then have resulted in some correction.

The same logic holds where the Indian bullion market is concerned. With the resumption of futures trading in gold and the lifting of several retrograde controls on its trade, Indian prices are influenced greatly by global trends.

Besides, unlike in the past, all players in the gold market are now allowed to hedge their risks through futures trading. Gold also continues to remain an integral part of virtually every investor's portfolio.

However, the want of adequate market intelligence, including reliable demand-supply projections, continue to be the bane of bullion markets everywhere, including India, the world's largest gold consumer. And the central banks' agreement on their own gold sales does little to change the picture.