Few events capture the resilience of gold as an investment portfolio diversifier than the bullion’s price trends itself. The yellow metal has long been a tested hedge against inflation and any period of steep climb in its prices generally coincides with a phase of high overall prices.
With inflation remaining high and volatile stock markets, gold prices have hit an all-time high for the better part of the last four years. Its prices had nearly tripled during the period as investors in Europe and the US flocked to buy the metal rather than save funds in unstable and risky equity markets.
Investment behaviour and logic, of physical assets in particular, are scale agnostic and generally holds true across individuals as well as institutions. That explains why India bought itself some glitter a few Diwalis ago when the Reserve Bank of India (RBI) purchased 200 tonnes of gold from the International Monetary Fund.
The RBI’s decision to strengthen the official yellow metal reserves to 560 tonnes had come amid growing interest of central banks across the world in diversifying their holdings to assets other than the dollar. China, too, has increased its gold holdings from 600 tonnes to 1,050 tonnes in the last few years. The reason: gold in the vault puts money a little further out of circulation because it is slightly more cumbersome to liquidate than, say, the euro.
It is, therefore, not surprising that last week’s big crash in the bullion’s prices was precipitated by fears that Cyprus would sell a substantial portion of its gold reserves to tide over its financial crisis. The resultant fright that it would set off a chain of indiscriminate dumping by other sputtering European economies has caused a fall in gold prices.
For India’s consumers and hard-pressed currency administrators, there is an opportunity in this crisis. With prices plummeting, the rush of buyers to snap up gold and stock jewellery is natural. For the government, which is battling to contain the outflow of greenbacks amid a widening current account deficit, this could bring some respite if the price of gold, a big import item, remains at levels much lower than its record peak.