Although, traditionally, the middle-class Indian had seen gold as synonymous with security, things changed in the last two decades due to a steady fall in the price of the yellow metal. Now, after a gap of 20 years there is an upward spiral. The downward trend was reversed in ’01-02 when the price of gold jumped by over 10%.

GOLD PRICES have been going through the roof reaching Rs. 6610 for 10 grams. Soaring prices and a sharp drop in festive season demand soured the appetite for gold in India, the world’s largest importer, with many consumers selling their old stocks to get good returns. Jewelers and retail buyers were not in a hurry to purchase gold at the tail end of the festival season that generally fuels buying of ornaments and with prices at 17-year highs following tensions in the Middle East and a tumbling dollar. Demand was low at all centers. In Madras it was hardly 10 to 20 kg a day, compared with an annual average of about 200 kg.

Domestic prices follow global trends because the country imports on average more than a tonne of gold a day to meet nearly two-thirds of its annual gold needs of about 600 tonnes. Gold crossed $445 an ounce as the US dollar traded near record lows against the Euro, making dollar-priced gold a bargain for Europeans. It was traded at about $416 and a month ago and $398 a year earlier. High prices have prompted many people to sell old jewellery and coins, bought earlier at much lower prices

“People are lining up outside my shop to sell gold. On average, 200-300 people are coming every day,” said a jeweler based in Mumbai. Traders estimated 75 to 100 kg of scrap gold were being sold in Bombay every day, against average sales of about 10 kg.
So is this a good time to sell or to buy?
Many investors follow the asset allocation process quite seriously i.e. they look at a basket of assets to make up their portfolio depending on their need for liquidity capital appreciation, regular income and security.

Although, traditionally, the middle-class Indian has seen gold as synonymous with security, things changed over the last two decades thanks to a steady fall in the price of the yellow metal. Gold as an asset was given less and less importance. Those who bought gold in the 1980s and 90s were parking a small portion of their assets to provide stability to their portfolio.

UPWARD SPIRAL

Now, after a gap of 20 years there is an upward spiral. Consequently, all those who have persisted in maintaining a part of their investments in gold have benefited in the recent past. There has been a systematic and sustained rise in the price of gold over the past four years. The downward trend was reversed in ’01-02 when the price of gold jumped by over 10%. Following the September 11 attacks on the US there was a rush towards safer investment avenues, which pushed up the price of the yellow metal. This was followed by another strong 7% rise the next year. The story continued in ’03-04, too, as gold prices vaulted 14%, registering the biggest rise in 12 years. At that stage, many thought the dream run was nearing its end, because such a sustained rise in prices was something new (for the past two decades). But some believed that gold was set for far greater price levels and that the rise would continue

The latter have been proved right. There has been no let up in the price spiral. In rupee terms a sum of Rs 10,000 invested in gold at the end of March ’01 is worth well over Rs. 15000 today, and a similar investment in April 2003 has grown to close to Rs 13000.

Going back into time, during the 1972-1975 period the price of gold rose from Rs 200 per 10 grams to Rs 520. This translates into a 37% compounded annual growth rate over the period, which is the highest consistent and sustained rise ever, according to the data available. The next golden period was from 1978 to 1982, which saw high and consistent rise in gold prices. The prices rose from Rs 550 per 10 gm in 1977 to Rs 1,719 for 10 gm during this period, at a compounded annual growth rate of 25.6%.

So, will the current bull run in the metal continue?

The dollar continues to weaken & tension in the Middle East is as high as it ever was. With Bush’s reelection fresh trouble concerning N. Korea and Iran could easily erupt. These are pointers to a continuing upward movement.

WORTHY OPTION

On the other hand, prices have risen very fast in the past weeks and a correction may be imminent. Also, much of the price rise is because the international price of gold is solar denominated and the weakening dollar is a major reason for the huge rise in price. The value of the Indian rupee is fairly closely linked to the dollar and so we see the same rate of rise. But where currencies float freely, the rise has not been anywhere near as steep. In Euros the price has only inched up.

Overall it would seem though that gold is worth considering as an investment option, but maybe one should wait for a correction.

Also, we have to stop thinking in the traditional manner where we looked on gold as the final security never to be sold. Even in dire circumstances, the most that you were supposed to do was pawn it and hope to redeem.

In fact one should buy gold in its cheapest form i.e. in a form where the “making charge” is negligible. Generally the cheapest ways to buy gold are bars, biscuits, krugerrands or sovereigns. The first two obviously carry the lowest premium. Other coins carry a larger premium and jewellery carries a premium that might negate any possible speculative gain. In India, however, jewellery accounts for 85 per cent of the demand. This is not the right way to invest.

So, gold is probably a good investment as long as one watches economic trends carefully and takes the emotional attachment out of the equation.

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