Saturday, May 5, 2012


Gold in an integral part of Indian culture. The importance of gold can be understood in the saying all glitters are not gold. It also can be noted from the way events or achievements are named like golden anniversaries, golden jubilee, gold medals, gold credit card etc. In India people buy gold anytime and not only during special occasions like weddings, festivals or special events. Gold is also offered to Indian deities. The Indian Hindu calendar even has auspicious days to buy gold like Dhanteras and Dassera. Gold is also bought on festivals like Onam, Pongal and Durga Puja. But now it seems that the global calendar is also going to make similar occasion for buying gold. Gold has changed with the changing times. The objective of this article is to find out the factors which will boost up the gold price to around Rs32000-35000/gram in Indian markets and internationally above $2100-2200/ounce .I find the next contributor to the price jump might be from RBI.
 The year 2011 was an impressive year for gold investments and in terms of performance. In volume terms it rose by 0.4% to 4067 tonnes with an value tagged at US $207.5 bn. Investment was the main contributor to gold values other than jewellery and technology drivers. The demand of gold bars and coins has accelerated globally followed with poor performance of other assets classes of investments.
Low and negative interest rates in US and European economy is going to boost up the returns and demand of gold prices till 2014.Further gold’s preference to hedge against Inflation will result to an higher demand of gold coming from India China and Vietnam. Global position of gold is also very strong. China needs no introduction regarding its gigantic gold demand. Moreover china is running with high inflation which spooks the demand of gold further in order to hedge against inflation. In fact I find no economy on the earth which has made propaganda to its citizens to invest in gold through all media forms. The reserve of the central banks has swelled by 500 tonnes over the last two years mostly by developing economies like BRIC. Further diversification of foreign reserves; add to the momentum of gold demand by BRIC nations. In other words these nations are trying to capitalize gold as preserving its foreign reserves and promoting financial stability. The ongoing volatile currency market international in domestically increase the demand of gold investments and storage. The below image is the demand chart of gold in tonnes.

One of the most enduring strength of gold price is its low correlation with risky assets class. In fact gold is shifting away from its “commodity” phase and into its “safe haven” persona. Gold price is not an bubble.US underperformance and European economic doldrums will give boost to the gold price and demand where as the real threat comes from china since its economic slowdown could cause minor affect of over gold outlook. No yield in US treasuries and bonds gives immense opportunity to invest in gold as an assets class which will increase demand of gold. India is also one of the economy who will invest more in gold rather in foreign reserves.Further gold futures and ETF are also prime contrbutors in the international market of Gold price.The below chart will make the my statment very much clear.
The real problem of gold which will spook the price of the metal is the performance of gold exploration companies across the globe. The problem with the exploration companies is that a lot of them will have financing difficulties and they will have to cut down on exploration. The financial turbulence and long gestation period of mining business affects the debt portfolio of the developed nations in this rattled times. They may not get financing at all. If you have 100 exploration companies, 80 to 90 of them could easily be out of business.
Every time gold has made one of strongest rally moves, a lengthy period of consolidation and digestion has followed before we have seen new highs. Often these periods last for more than a year. In some cases – if the preceding move has been large – the consolidation has lasted for over 18 months. Hence we should not under estimate gold price movements in the long run. We saw surge in 2011 gold started the year at about $1,420. It sank to $1,309 by late January. It then began an upward move of almost 50% that ended in September at $1,920. It moved 30% alone in the two months from July to September. I find we all have become too much greedy that’s why we are flocking for double growth rather than an slow and steady growth in gold price.
PRICE backed by RBI
 As I said in the beginning that Gold in an integral part of Indian culture well the proof of this is that Indian households hold more gold compared to the kitty of RBI. More than 18,000 tonnes of the metal is lying in Indian households. This has also shored up the import of gold of India. India’s Gold’s share in total import bill of the country has gone up from 8.1 per cent in 2001-02 to 9.6 per cent in 2010-11. Annual Rate of Gold Imports growth in the last three years was very high. In 2008-09 the growth was 23.0 percent, in 2009-10 it was 38.1 per cent and in 2010-11 the recorded growth stood at 18.3 per cent. Thus the average rate of growth during this period was 26.8 percent. One of the most astonishing strength of our gold culture is that Indian consumer demand for gold is 37.6 per cent more than that of China. Whereas in terms of GDP, India’s GDP is just 27.7 percent of China and a meager Whereas in terms of GDP, India’s GDP is just 27.7 percent of China and a meager Whereas in terms of GDP, India’s GDP is just 27.7 percent of China and a meager 11.0 percent of USA.
Well the above figures are enough to boost the Indian gold culture but we need to make an quick look over the rising burden over Indian fiscal deficit backed by gold import. The steady rise in the price of gold and a weakening local currency pushed up the import bill for gold to a staggering $55 billion in 2011. After petroleum products, gold accounts for the highest outflow of foreign exchange. This has propelled the fiscal deficit of Indian economy. One of the prime reasons for increase in gold import is to fight against high inflation in recent years and weakening stock markets which meant that gold has been yielding better returns than other investments. Gold has given a return of 32 percent over other asset classes in Indian economy. Out of total reserves of gold by India household this tunes to 18000 tonnes of gold, one fifth of that is in the forms of bars and coins. Further new options of investments in gold like -
  • E-gold,
  • Gold ETF
  • Gold fund of funds and
  • Gold futures.
-leads automatically to the demand of the gold. The most important point to accentuate is that through E-gold and Gold ETF the investments finally leads to buying of gold from paper format to Hard Gold. Hence these products are the indirect ways of increasing the demand of Gold.
 The ballooning fiscal deficit will force RBI to buy gold in order to balance the dollar reserves and balance of payments. The Reserve Bank is holding gold reserves of 557.75 tonne valued at USD 27.02 billion, according to the Parliament information. In other words RBI holds 557.75 tonnes of gold as part of foreign exchange reserves. Indian has about $270 billion foreign reserves in dollar terms with the Reserve Bank of India, which is enough to fund imports for the next six to eight months. The recent internal ratings of the Indian economy will spook the problems for the rupee which has already began results the deficit to swell more. Now when RBI will try to print more money it needs to increase its gold reserves to back up the printed money. RBI prints money and currency notes according to demand of cash and there is certain limits. This is depends upon gold reserve at country. To protect the public and guarantee the nation against any bankruptcy, the RBI keeps a certain percentage of gold in their own safe deposit vault, in proportion to the additional currency minted and directed into the circulation. According to the foreign exchanges reserves management operations RBI bought gold from IMF in 2009 and might go for another round of buy. This will enable RBI to increase the circulation of money into the economy which will help to meet to objectives of the Indian economy1) Basel III and 2) Surge is credit growth within the economy.
Hence RBI is baffling short of its reserves to pay in dollar terms of the imports. In order to increase pay in dollar terms it will need more money which they will print balance based upon buying gold volume. Keeping the trends in mind international demand and domestic reasons to support gold prices I find Gold prices will rise to Rs.32000-35000/ounce & internationally above $2100-2200/ounce within a 2years time frame. This is not lunatic comment. According to the international economic conditions Central Banks will go for shopping of gold.
 My longer-term prognosis for gold remains unchanged. Well there is something really to make us feel proud about the Indian gold culture but we need immediate diversification of the investments from gold to other classes. But in between all these us Indian needs to take an different approach. Too much investment in gold portfolio is going to create problems once gold price goes for a deep correction. We need a change in our Indian gold culture. We need to explore ways in which people could be encouraged to deposit these bars and coins with the government to earn an interest income. Since if an part of this gold is deposited through an scheme where the government could lease out some of the gold to jewelers or find other mechanisms by which it could earn returns and that return would in turn be invested in capital for projects the government. Gold prices are just to going to increase since we have opened up so many options of doing investments that’s its value is only going to increase.



Nice article..but few clarifications needed:
1. Is the policy ofMaintaining Gold reserve to print more currency still remains in vogue? Then more than India, US and European ecomies need to print more currency to cover up their deficit.

2. How buying Gold by RBI is going to help in controllling Deficit and Inflation?

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