Oct 10, 1999|
As good as gold!
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 local markets had been languishing for some time now. 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 reaction to the favourable response to the auction, gold prices escalated sharply 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 their decision to limit gold sales to 400 tonnes per annum over the next five years. They also decided 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 see the impact of all this on Indian markets. The period commencing approximately a fortnight from now, and lasting upto the middle of March, comprises the Diwali (festive) and marriage season. It is during this season that demand for gold is at its peak in the subcontinent. With the supply being restricted, and demand likely to surge over the next few months, where gold prices are headed is anybody's guess!
Gold as an investment
Gold finds a place in the portfolios of many investors. This can be attributed to the following reasons:
Gold has historically proved to be a good hedge against inflation
It is highly liquid
It has ornamental value (more so for Indians)
Also, it enjoys a high degree of moneyness, meaning that it can easily be sub-divided or interchanged, serve as a store of value and also be easily authenticated
On the other hand, investment in gold also has its disadvantages:
It does not provide regular current income e.g. interest on a debenture
It does not offer any tax advantages e.g. investment in a infrastructure bond entitles one to certain tax advantages
There is a possibility of being cheated with respect to the purity of the metal
There is a storage cost involved in preserving gold.
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