Prices of gold have moved up even as stock markets tank around the world. The ongoing turmoil has shown up gold as an effective hedge against financial uncertainty. Gold prices crossed Rs 13,500 in the Indian market on Monday even as the price of a gold sovereign crossed Rs 10,000 for the first time. For Indians, this is good news as we hold almost 15 per cent of the world’s total stock of gold, an estimated 18,000 tonnes, now worth $576 billion — almost twice of India’s forex reserves. It is now out of reach of many middle-class buyers.
“The fundamental reason for the high price of gold is the demand supply mismatch. While the supply of gold being mined is constant, the demand is growing because of India, China and the Gulf countries,” says Mr Keyur Shah, associate director, World Gold Council, an industry body. “During the near term however, gold prices are rising because investors are trying to hedge against inflation. The US dollar is weakening and crude oil prices are high, signs of inflation,” he adds.
However, the volatility in gold prices is driving away consumers. India, which is the world’s largest gold market, saw a 64 per cent decline in gold sales during the last quarter of 2007 as customers kept away from volatile prices. Crude oil and gold advanced to records as the dollar dropped after the Federal Reserve cut its discount rate at an emergency meeting and JP Morgan Chase agreed to buy Bear Stearns as its shares collapsed. The precious metal surged to $1,026.45 an ounce from previous close of $995 in New York on Friday evening. Crude oil prices rose to record $111.42 a barrel and gold to about 1,032 an ounce as investor confidence in financial assets eroded.
There is a disturbing parallel however. Gold and Oil prices had hit a peak in 1980 just after the second oil shock. However, immediately afterwards, prices of both the commodities plummeted. Mr Shah dismisses any similarities between then and now though. “What happened in 1980 was a 15 day glitch due to the Iran-Iraq war. The spike in prices was very sharp. This time, prices have risen comparatively slowly,” he says.
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