Gold as anchor

GOLD: The metal's price is soaring worldwide, even as hoards begin trumbling out of closets in India

All that is gold does not glitter. Ask jewellers. The glitter is missing from their cash boxes, despite the beginning of the wedding season, with fresh gold buying down 30-35 per cent.

How come? It's a rare occurrence. People, with a penchant for gold buying ahead of marriages, are using their hidden hoards of the metal instead of buying expensive new stock.

Coins, biscuits, old jewellery, even bars "" they're emerging from secret lockaways to be molten and reshaped into new jewellery. In a country where tradition runs deep and some memories of asset-losses on account of financial chaos run even deeper, gold serves as a treasured "store of value".

"Overall, more hoarded gold is expected to come out this season," says T Gnansekar, an independent analyst.

Look at the figures. Recorded Mumbai demand is down to 500-600 kg per day from a normal 800-900 kg around this time of the year, according to a local trader.

"Following the sudden spike in prices overseas, domestic demand has seen a decline," says Suresh Hundia, director of Hundia Exports, and former president of Bombay Bullion Association (BBA).

But the gold jewellery craze is not exactly dipping, it seems (even though diamonds are gaining share among the younger lot). Domestic gold prices are touching new all-time highs almost every second day, in tandem with multi-year highs overseas.

Domestic gold saw a high of Rs 8,770 per 10 gm earlier this week in Mumbai, as overseas spot vaulted the psychological mark of $600 per troy ounce to touch a new 25-year high.

"A small correction can be seen, but it will only support fresh buying and thus, further price rise. Overseas spot is expected to touch $620-a-troy-ounce level, and the domestic price, Rs 9,100 per 10 gm," says Prithviraj Kotheri, a Mumbai-based trader.

If that's not much higher than current levels, according to Hundia, it's because current stock levels are "comfortable".

But the global scenario could change swiftly. The possibility of gold going even higher is outlined by GFMS's Gold Survey 2006, which predicts an investment-driven bull run.

Says GFMS's head Philip Klapwijk, "Levels safely over $600 are now in our sights and further hefty gains over the next year or two are quite possible "" in the right circumstances, even the 1980 high of $850 could be overtaken."

An interesting point, however, is that the Indian gold price has been converging with the international price. "The differential is down to Rs 34 per 100 gm today compared with Rs 60 per 100 gm a month ago," says V. Sivaramakrishnan, executive director of Dubai-based Kombench DMCC.

One plausible reason is that the supplies are from local sources, so the "import premium" is in decline as India's own hoarded gold tumbles out.

The bigger point is that gold in the modern age is not very mobile compared to other assets. Most of the gold in India stays put, and is hard to put to "flight". Moreover, "Indians cannot do without gold" according to Harmesh Arora, a Mumbai-based bullion wholesaler and former vice-president of BBA. So gold's stability, by and large, is assured.

Consumption demand is likely to stay stable too; the marriage season in the country began April 12 and the auspicious occasion of Akshayatritiya, which sees many gold-laden marriages, is on April 30.

What's more, hoarded stocks will run thin at some point. So traders expect demand to go back to earlier levels.

"India will consume about 1,000 tonnes of yellow metal this year, compared with 850 tonnes last year," predicts Asheesh Majumdar, chief general manager, MMTC. Investment demand will lead the figures, he adds.

The metal that John Maynard Keynes thought so lowly of could well turn in a surprise "" as a rational bet.