Gold as a Symbol of Global Gloom

Analysts attribute the current global gold rally to expectations of even more dollars rolling off American presses as part of the Fed’s QE3

India’s gold imports have fallen with a resounding thud. In terms of tonnage, imports of the metal were 56 per cent lower in the first quarter of fiscal 2012-13 than in the same period the year before. There is little evidence that the quantity smuggled in has shot up instead. Demand is down. If the country is losing its fondness of the yellow metal, one reason could be its high global price at $1,667 per troy ounce (31 gm), which, with a weakened rupee, translates to a record high of Rs 31,400 for 10 gm in the domestic market. This is prohibitively expensive for most jewellery buyers. Moreover, the rise in the price of gold has been sharper in India than elsewhere. Not only has the rupee lost a fifth of its value vis-à-vis the dollar, an import duty of 4 per cent imposed on gold this year has had an effect.

To speculators, meanwhile, it is not clear how much higher gold will go. Globally, ever since the Great Recession set in, nervous investors have piled huge sums of cash into the metal. Today, its price is double what it was in January 2008. This partly reflects fears of a paper assets crash, currencies included. It is also a result of the extra cash printed by the US to sustain its economy. Some of this money ends up in gold. Also, such a monetary policy is seen to ‘debase’ the dollar on a long-term calculation, even if the currency stays in higher demand than others. In fact, analysts attribute this summer’s gold rally to expectations of even more dollars rolling off American presses. And sure enough, the US Federal Reserve has hinted at yet another round of ‘quantitative easing’ (QE3). Consider this from the minutes of its latest Open Market Committee meeting: ‘Many members judged that additional monetary accommodation would likely be warranted fairly soon [unless the US recovery gets much better].’  This explains the rally, says Chirag Mehta of Quantum Asset Management. Once QE3 begins, gold could go to $1,800-1,850 “within no time” expects Mukesh Kothari of RiddiSiddhi Bullion Ltd. Could the price go past its 5 September 2011 peak of $1,895? Possibly. How long the rally lasts, says Mehta, depends on the extent to which the US Fed’s actions debase the dollar.

Will higher prices put even more Indian buyers off gold? Opinion is divided. Some feel that once consumers get used to the current price, they will adjust to the recent ‘sticker shock’ and return to their age-old love of the metal. This, they say, has happened in the past as well. However, others wonder if the country’s gold fixation has finally reached a limit.

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