Gold traditionally has an inverse relationship with the dollar. Hardening of the US currency, as is now happening in the wake of downgrade of sovereign credit ratings of Greece and Portugal, should have made the situation ripe for investors to sell gold and park the money in greenback and other assets. Investors are not sure how the European debt crisis will pan out and therefore, they are not expected to hitch onto any paper currency.
Following Standard and Poor’s assigning junk status to Greek debt and downgrading Portugal sovereign credit rating, the market for currencies and precious metals has moved out of kilter. In the present uncertain times, investors, according to a senior market strategist with MF Global, will be involved in reassessing their portfolios and many will instinctively be turning to gold.
Amid concerns for sovereign debts and currencies like the euro and the pound, the risk averse investors will seek refuge in something which could stand ground in a difficult economic environment. Gold, often described as the ultimate refuge for investors under pressure, has climbed to its highest since December and experts will not rule out the metal hardening further as long as the Europe remains a cause of concern. December saw the all-time high gold price of $1,266 a troy ounce.
Price of gold is denominated in dollar and therefore, the precious metal has become so much more expensive when bought in currencies like the euro which got devalued vis-a-vis dollar in recent periods. Gold has two principal consumption points — investors buying the metal as a hedge against economic uncertainties and jewellery. What works in favour of gold in times like now is its very limited industrial use. What is not going unnoticed is that other precious metals such as silver, palladium and platinum with a much higher degree of application in industry than gold have lost some ground due to economic worries.
The strong preference for gold over currencies, government bonds and commodities saw investor demand for the precious metal overtaking its use by the jewellery sector in 2009, for the first time in nearly 30 years. Last year jewellery makers bought 1,759 tonnes of gold against investors acquiring 1,901 tonnes. It is still early to say whether investment demand for gold will stay ahead of jewellery demand in the current year like last time.
But account has to be taken of two things. First, at about $1,170 an ounce now, the demand for gold jewellery in India and China, the two principal markets for jewellery, will recede. Second, gold price has come this far riding on the back of investment demand and there are no signs of this demand dampening in the short to medium term. Many believe this year will see gold rising to $1,300 an ounce and may be above before correction happens.
Unlike in the rest of the world where gold demand is almost equally split between investment and jewellery sectors, here in India investment in the metal is yet to become a habit of consequence with the people. Nearly 90 per cent of gold imports by India go into jewellery making. But as we saw last year when the metal becomes too expensive, people will make new jewellery out of old ones giving a boost to recycling and use of scrap.
Gold prices here are now within a whisker of Rs 17,000 per 10 gm. The price no doubt is stiff enough to chase away buyers of new gold jewellery other than high net worth individuals. India claims the distinction of being the biggest market for gold. But a caveat needs to be put that because of high prices, drought in many parts of the country and general economic uncertainty last year’s gold imports were down 18 per cent to 343 tonnes. Demand too took a knock by a percentage point higher, thanks to limited enquiries from investors.
Much to the disappointment of families here, the European crisis broke out coinciding with the beginning of the Indian wedding season when gold demand is traditionally at its highest. Demand for jewellery accounting for half the world gold use is sensitive to price. Last year’s high prices ensured a nearly 20 per cent cut in world jewellery production taking it to a 21-year low. Despite last year’s demand and import contraction, India sits at the top of gold using countries’ table. This market, therefore, is of strategic significance for the world gold industry and World Gold Council (WGC), the agency created to promote the use of the metal.
No wonder, therefore, that WGC now routinely has gold promotional programmes here coinciding with major Indian festivals, nation or region specific to induce people to buy jewellery. Jewellery houses, whose income depends largely on making charges, will see revival in their fortunes only in case there is a major gold price dip. An expert says gold in the $700-$800 range will see good demand for jewellery in India.
