Asset of the decade

Low jewellery demand: Interestingly,it is the investment-led demand that is spurring gold demand and not the jewellery demand. Jewellery demand in the past has constituted 60% of the overall annual demand of around 3,500-4,000 tonnes. But in 2009,it fell to 51%. Higher gold prices and its volatility are keeping jewellery buyers away. Perhaps at these prices,women in India and the Middle East are buying lesser and lesser. “It’s a lean period at present. We expect prices to be supportive post-Diwali and the demand to pick up during the marriage season in October to December,” said Amar Singh,head,commodity and currencies,business development & research,Aditya Birla Money. In the lean season of June-July,gold prices back home have already slipped to a three-month low.

According to Amol Tilak,senior research analyst,Kotak Commodity Services,gold prices will bottom out at $1,050 per ounce or Rs 17,750 per 10 gm this year,which is a fairly good level to buy. That said,he believes,the pick up in demand for jewellery won’t be substantial,but only slightly incremental.

Rising scrap sales: The rise in scrap sales is also leading to lower demand for new gold jewellery. “While jewellers purchased gold (bars to make jewellery) at higher prices last year,they seem to be wary of taking any such decision this year. The caution comes from a rise in scrap sales through exchange of old gold for new by consumers,” said Rajini Panicker,head of commodities-research,MF Global.

Panicker expects India’s gold imports to decline by 40% in 2010 from 343 tonnes in 2009. “Last year,Indian consumers sold 115 tonnes,a third more than in 2008. We could continue to see a similar trend this year again given such high price levels,” said Panicker.

ETF (exchange-traded fund) demand picks up in Q2: The decline in jewellery demand,though,is now offset by the rising investment demand in gold ETFs,coins and medals. With European crisis and weakening of the dollar,investors are clinging to gold to offset portfolio losses. In the June quarter,when the Chinese economy controlled investments into the real estate,many of them bought gold bars instead.

According to World Gold Council’s July report,the second quarter of 2010 saw a flurry of fresh gold purchases via ETFs. With 273 tonnes of gold ETF buying,it was the second-largest quarterly inflow on record. Globally,gold in ETF form reached a record 2,014 tonnes worth $81 billion.

“The numbers clearly indicate that holdings in gold ETF will rise due to economic worries in the near future,” said Kuljeet Kataria,VP,commodities,Motilal Oswal Commodities. “We believe the ETF demand should continue to accelerate in a scenario of low interest rates,which keeps opportunity cost for holding gold low,making gold a safe haven in times of uncertainty,” said Panicker. But the worry is that when the tide turns and the world economy comes out of the current gloom,this investment might finds its way back into equities or other assets. Perhaps,nothing could act as a stronger demand support for gold prices than jewellery demand.

Central bank mop-up: Central banks worldwide,though,are compensating for the fall in gold demand. China,Russia and even India are lapping up gold as a means of diversification of their reserves. “Some buying may be seen because of inflationary concerns in major economies as a result of the excess cash pumped in the market in the form of stimulus packages,” said Kataria. Adds Singh: “Gold reserves will help central banks diversify their foreign exchange portfolio.”

Last year,sales from central banks had almost dried,compared with the average sales of 520 tonnes a year between 2000 and 2007,said Panicker of MF Global. “Going forward,we believe central banks of non-gold producing countries will be net buyers,” she said.

Future: Industry observers continue to be bullish on gold in the long term and feel that uncertainties in major economies and currencies (dollar and euro) will be the major triggers for gold prices,going forward. “From a long-term perspective,inflation concerns will be a major factor for the spurt in gold prices,apart from central bank buying and ETF demand,” said Singh. According to Panicker,more quantitative easing measures and an extended period of lower interest rates will support gold prices.

Prices have cooled down a bit of late,though. That’s because the monsoon is generally a slack period for gold buying,say market observers. “Already,gold has moved from Rs 19,000 levels to Rs 18,000 levels and might test the bottom. But both the price and demand for the metal will pick up post-October,” said Tilak,senior research analyst,Kotak Commodities Services. Prices are hovering at Rs 17,750 per 10 gm.

Gold has long been perceived as an inflation hedge and a safe haven in times of geopolitical and financial market instability. Unsurprisingly,in these times of uncertainty — as the world struggles to emerge out of an economic black hole and paper currencies get increasingly debased — the allure of the yellow metal is proving even more irresistible. Even its past track record of performance has been impressive. But perhaps the timing of investments now might not be right,given that the genuine jewellery-led demand is still elusive. And the festive season is a testing period.