Why is yellow metal shining more?

Updated on Aug 28, 2012 11:15 PM IST

All that glitters Gold prices have hit an all-time high, resulting in falling imports. HT explains the factors influencing price rise.

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HT Image
Hindustan Times | ByGaurav Choudhury

All that glitters Gold prices have hit an all-time high, resulting in falling imports. HT explains the factors influencing price rise

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 avenue for parking surplus income.

Why are gold prices rising?

Gold is considered to be a safe haven asset. With high inflation 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 flock to add more glitter to their investment portfolio rather than park funds in unstable and risky equity markets.

What is the trigger behind the latest price rally?
The speculation that the US Federal Reserve was planning to announce a fresh round of monetary stimulus at a key central bankers’ meeting has knocked up bullion prices. US Fed chief Ben Bernanke will likely announce a third round of bond-buyback program known as quantitative easing later this week.

Why would a monetary stimulus in the US push up gold prices?
A monetary stimulus, by definition, will infuse more money into the system. The resultant increase in money, some experts believe, will likely push up inflation through the interplay of the classic text-book model, where prices go up because too many would be chasing too few goods. As inflation goes up, people, it is widely believed, will 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, which has slid more than 12% since March, has further fanned imported bullion prices. A weak rupee makes all imported goods --from gadgets to gold costlier.

How do high prices impact 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. Low farm income, combined with high overall inflation, will leave rural households with less surplus income to invest in assets such as gold.Nearly 60% of the total gold demand in India comes from rural areas, most of which is 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?
The allure of gold in India is driven by a mix of factors including vanity. 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 surge during the Akshaya Tritiya festival in May. The motivation for a jewellery purchase can be inextricably 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 nuptials typically account for 50% of 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 the wedding-related purchasing will drive approximately 500 tonnes a year. A further 500 tonnes of existing gold will be gifted by one family to another.

How will a drop in gold imports help India’s overall economic management?
Economists have attributed India’s widening current account deficit — the gap between export earnings and import payments — to rising gold imports, among other causes. India’s gold import had jumped nearly 50% to $60 billion in 2011-12 from the previous financial year pushing the current account deficit to a record $78.2 billion or 4.2% of GDP. This had prompted the government to hike import duty on gold to curb imports.

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