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Gold regains its lustre

Sep 30, 1999

India is the single largest consumer of gold in the world. This fact is not surprising given our penchant for gold not only as store of value but also for ornamental purposes. The strong demand for the yellow metal did not wane even as Indians incurred notional losses on their gold holdings during the recent crash in prices. While investors the world over reworked the returns on gold, the Indians continued to lap it up in large quantities. And now it is time to get rewarded.

Gold prices in the international and Indian markets had been languishing for some time. The reason for this was the potential increase in supply in world markets following the decision taken by a number of central banks and the International Monetary Fund (IMF) to liquidate their gold holdings. This gave rise to fears of a supply glut, and consequently prices began to be marked down.

However, over the last fortnight the situation seems to have turned around dramatically. Things began to look up when the Bank of England (BoE) evoked an extraordinarily large response (8 times) for 25 tonnes of gold, which it had put up for auction. The auction achieved a price of US$ 255.75/oz. The high bids indicated that there was a robust demand for the metal in the market. As a consequence of the large response to the auction, gold prices registered a sharp increase to US$ 260/oz.

For the rest of the week, the prices continued to move up, slowly but steadily.

The big news came over the weekend. Central Banks of 15 leading industrial countries (accounting for 50% of all official gold holdings) announced that they had decided to limit sales of gold to 400 tonnes per annum for the next five years. They also stated that they would not increase gold lending above existing levels. This news set the markets on fire. Gold prices shot up to an intra day high of US$ 283/oz, an increase of 6.4%.

Since then, there has been no looking back.

Now, let's again look at the Indian markets. The period commencing approximately a fortnight from now, and lasting upto the middle of March, comprises the Diwali and marriage season. It is during this season that the demand for gold is the highest in the subcontinent. With the supply already having been contained, and demand likely to be strong over the next few months, where the price of gold will be headed is anybody's guess!

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