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Unravelling the gold price puzzle

BEHIND THE GLITTER: As Diwali approaches, prices of the yellow metal have rebounded, after having fallen from a record high to a nearly 10-week low. HT explains the factors that influence its prices.

business Updated: Nov 07, 2012 03:43 IST
Gaurav Choudhury

BEHIND THE GLITTER: As Diwali approaches, prices of the yellow metal have rebounded, after having fallen from a record high to a nearly 10-week low. HT explains the factors that influence its prices.

Why do people invest in gold?
Gold is one of the several assets that people invest in. Unlike equities or bank deposits, gold is a physical asset and has been a traditional favourite for parking surplus income.

Why were gold prices rising in the last six months?

Gold is considered to be a safe haven asset. With inflation remaining high and volatile stock markets, gold prices have hit an all-time high. It has risen 35% over the last one year as investors in Europe and the US flocked to add more glitter to their investment portfolios rather than parking funds in unstable and risky equity markets.http://www.hindustantimes.com/Images/Popup/2012/11/07_11_12-buss25b.jpg

Why have gold prices been falling in recent weeks?
Gold prices dipped sharply last week in response to better-than-expected employment figures in the US, which eased speculation on the safe-haven metal. Bullion prices, however, rebounded smartly on Monday amid active buying by traders and speculators amid wedding as well as advancing festivals.

Will gold prices continue to fall?
Analysts said that it may not be wise to bet on further dips ahead of the jewellery shopping season during Diwali.

What factors were pushing up gold prices in recent months?
The US Federal Reserve had announced a fresh round of monetary stimulus to shore up the economy. A monetary stimulus, by definition, will infuse more money into the system. The resultant increase in money, some experts point, pushed up inflation through the interplay of the classic text-book model where prices go up because too much would be chasing too few goods. As inflation goes up, people, it is widely believed, invest more in gold to protect erosion of their asset values in the wake of high prices.

What about the trends in India?
Gold consumption and imports are set for a sharp slowdown in India as a wobbly world economy, weak rupee, patchy monsoons and a slowdown in the broader economy are threatening to take the sheen out of the yellow metal’s sales in the coming months. In India, a weak domestic currency that has slid more than 12% since March, has further fanned imported bullion prices.

How have the high prices affected imports?
Gold imports have fallen more than 56% to 131 tonnes during April to June this year, the industry body World Gold Council said in a report released last week. Analysts said hardening prices will further knock down gold’s demand in India, the world’s largest bullion consumer.

How do monsoon rains affect gold prices in India?
This year, deficient and late monsoon rains are set to trim food output and likely hit farm income, which supports two-thirds of Indians, or about 800 million people. Rural spending on most items — from television sets to gold — goes down with inadequate rains and farm output. Nearly 60% of the total gold demand in India comes from rural areas, most of which are bought during weddings.

How big is the Indian jewellery market?
India is the world’s largest market for gold jewellery, accounting for most of the nearly 1,000 tonnes of gold imports in 2011. According to the World Gold Council 75% of women say they are constantly searching for new designs.

What drives the demand for gold in India?
More than 50% of gold jewellery is bought for weddings. The festival of Dhanteras, the most auspicious day in the calendar just before Diwali, has traditionally created a strong seasonal surge in sales. Demand also surges during the Akshaya Tritiya festival in May. The motivation for a jewellery purchase can be linked to value, wealth preservation and growth, rather than pure adornment. Therefore, there is little distinction between investment and jewellery demand. Gold is integral to all Indian wedding ceremonies: purchases relating to weddings typically account for 50% of the annual jewellery demand. With 50% of the Indian population under 25 and approximately 150 million weddings anticipated over the next decade, the World Gold Council estimates that wedding-related purchasing will drive approximately 500 tonnes a year. A further 500 tonnes of existing gold will be gifted by one family to the other.