World gold prices have sunk to five-year lows. At the current levels of around $1,100 per ounce in London and Rs 25,000 per 10 grams in Mumbai, they are way below their peaks of $1,895 and Rs 33,265 reached on September 5, 2011, and August 28, 2013, respectively. This isn’t a bad thing. Bull runs in gold are normally a manifestation of runaway inflation and currency instability, resulting in people choosing to park their savings in physical as opposed to financial assets. It was no small coincidence that the last gold price spiral happened during a period of acute loss of investor faith in the dollar. The US Federal Reserve’s move to embark on an unprecedented monetary expansion, along with the central banks in Europe and Japan, led to diminished trust in fiat currencies that are backed by nothing but the credit of the issuing governments. Gold prices, similarly, hit an all-time high in India precisely on the day the rupee crashed to a lifetime low of 68.85 to the dollar.
In that sense, the fall in gold prices represents a return to normalcy. With the US economy recovering and the Fed ending its quantitative easing programme, while contemplating a hike in interest rates from the current near-zero levels, the dollar has regained its old strength and credibility as the world’s reserve currency. That has also reduced the allure of gold as an alternative safe haven. This applies to India as well, where the rupee’s current stability, both in terms of its exchange rate vis-à-vis other currencies and domestic purchasing power, has made gold a less attractive investment option. Gold ultimately generates no returns apart from price appreciation — unlike the rental incomes from land, dividends from shares or interest from bonds. It is natural and welcome, therefore, that investors are putting their money back in equities and financial assets.
From India’s standpoint, there is an additional reason why the lower demand for gold as an inflation hedge and a reliable store of value is welcome. The country imports the bulk of its gold consumption requirement. While investment in gold may represent savings for individual households, it translates into a drain of foreign exchange for the economy as a whole. Between 2011-12 and 2014-15, India’s annual gold imports have dropped from $56.5 billion to $34.4 billion. That owes itself primarily to inflation control and macroeconomic stability, on which there must be no let up.