Steep prices take sheen away from gold this season

Across the country, buyers have shied away from gold this Diwali, despite initial reports indicating a recent spurt in the metal, as a retail investment. With gold prices closing at over Rs 6,900 per 10 gm, analysts say current prices are still 10 per cent higher than a year earlier. The yellow metal is set to scale new peaks in the medium-term due to choppy currencies and stock markets — not good news — warn analysts.

Rising gold prices is often an indicator of an economic slowdown. With gold hitting an 18-year high of $473 an ounce on September 30, global metal analysts wonder whether the market is sending a message. Led by fears of unpredictability in the global economy and inflation risk from higher oil and commodity prices, gold is witnessing an unprecedented investor demand around the world.

‘‘When there is uncertainty in any field, gold prices go up,’’ said Sushil Sinha of Geojit Financial Services Ltd. ‘‘Uncertainty in the US economy and fears over a weakening US dollar have led investors to move money into safe havens such as gold with the expectation of a further rise in prices.’’

Madan Sabnavis, chief economist at National Commodities and Derivatives Exchange agrees. He thinks gold is a safe bet. ‘‘The fundamental fact is that gold is looked upon as a substitute for currency,’’ he said.

Gold prices in India in the last 24 months have risen from Rs 5,800 in October 2003 to Rs 6,800 in October 2005, said analysts. The rise will continue, they added.

In the US, gold is expected to rise as high as $500 an ounce in the coming year.

The last time that gold prices rose so high was in the late 1970s when oil prices peaked in a big way. Then gold prices had topped at $850 an ounce in January 1980.

What followed was a recessionary period of two to three years. Of course, normalcy was returned but current events are eerily similar to the late 1970s.

But the Indian scene is not so bleak, as gold remains a favoured investment in traditional households. ‘‘For the conservative investor, gold is as good as a fixed deposit in a bank,’’ says Sinha.

The domestic gold rally has been attributed to the sharp rise in demand from rural areas on the strength of a good agricultural year. But if prices maintain this trend, analysts wonder how rural consumers will react.

Meanwhile, bullion traders and gold retailers of bars and coins are cheering the price rally.

With stock markets still volatile, post-Diwali gold prices may rise even further, say experts. They see demand for the metal coming from retail investors who see it as portfolio insurance, an asset that will prosper when stocks and bonds are wilting.

For buyers like Kasliwal, that does not bod well. ‘‘One may have to stock up now to make future purchases for marriages and other auspicious events.’’