Rupee rise takes sheen off yellow metal

Global investors in gold have made decent profit. However, the situation in India is completely different as the appreciating rupee has capped the gains of the yellow metal.

The international gold price was $725.38 on May 12, 2006. It crossed that level on September 19 before closing at $723.75. During the same period, the domestic standard gold price declined from Rs 10,665 to Rs 9,445 per 10 gm, recording a drop of 11.5 per cent. The decline is attributed to the rupee rise against the dollar by about 11 per cent during the same period.

"Indian investors have not made money in gold due to the appreciating rupee," said Bhargav Vaidya, a bullion analyst.

Last summer, the yellow metal fell to a low of $567 in June 2006. At that time, the domestic price was Rs 8,515 per 10 gm and the rupee was dollar was 45.98 to a dollar. Since then, the global gold price has gone up by 27.59 per cent, while the domestic gold has risen by a mere 11.51 per cent.

"While investing in gold, Indian investors are advised to take a call on the rupee-dollar rate also," said an Indian head of a global gold research firm.

The rising rupee has insulated domestic jewellery manufacturers from the increasing international gold prices. However, as global prices rise fast, they are facing the heat as most of their orders are not hedged.

"It is not a good time for gold jewellery manufacturers," said Suresh Hundia, president, Bombay Bullion Association. He added that despite the ongoing festival season, there was no demand for the yellow metal as a result of a swift rise in prices. The daily demand for gold in the Mumbai market, which was around 1 tonne, had come down to 100 kg, he said.

Gold is also exported to benefit from incentives. Market sources said the annual export was between 60 and 100 tonnes. Since direct export of gold is not permitted, it is shipped as crude jewellery or in the form of coins. This helps many star trading houses to complete their export target and earn various incentives.

The export of gold is also used as an interest rate arbitrage. Export finance is available at a much lower rate compared with domestic bank finance. Importing gold in dollars and re-exporting it in the yen or the euro was lucrative, said a bullion market trader.