Economic Highlights

New Delhi, 4 November 2010

Tottering Dollar

GOLD OUTSHINES INVESTMENTS

By Shivaji Sarkar

Gold is surging and surging high. It has regained its prime position and emerged from the shadows. Its price veers round Rs 20,000 per ten grams and is likely to rise further. The big question is: Would it lead to another global market burst?

During the past few decades, the development of financial markets and economic growth continued without dependence on gold. The phenomenon began in 1971 as the US delinked the dollar from gold standard. For many, the dollar had become the investment tool. With the tottering of the dollar, once again people are looking at gold as an investment avenue. They are no longer merely thinking in terms of jewellery or a fashion statement.

Gold started rallying in late 2008 following the collapse of major firms such as Lehman Brothers, AIG, and the sinking of the US economy. Standard gold was sold at Rs 13,435 per 10 grams in December 2008. By this October, it has been touching Rs 20,000. It rose by Rs 2000 since August, when it was priced at Rs 18600.

But, the sky-rocketing prices have increased old gold’s availability. Global consultancy firm GFMS Ltd estimated India’s total gold demand at 432 tonnes in 2009. In its latest report, the World Gold Council (WGC), estimated that India’s gold availability through used jewellery rose sharply to 200 tones in 2009, which is perhaps the highest. During Diwali, it is estimated that Delhi and Mumbai together would deal in at least three tonnes of gold

As per industry estimates, it has been an Indian tradition to invest in gold for ages. The total estimate touches 800 tonnes. Now the RBI and other central banks are also investing in gold as the world economy and currencies pass through a critical phase.

According to the modalities for the gold sales adopted by the Executive Board of the International Monetary Fund, gold will be sold off-market directly to central banks and other official sector holders at market prices. During October and November 2009, IMF sold a total of 212 tonnes in this manner to the RBI, Bank of Mauritius, and the Central Bank of Sri Lanka. On September 7, 2010, it sold 10 metric tonnes to the Bangladesh Bank.

The Managing Director, Tan Khandaker, of New York-based Khandaker Morgan, thinks gold hedging strategies by large funds will underpin a rising gold price at least for the next few years and perhaps beyond. Apparently, investors are wary of investing in one particular asset and are diversifying their portfolio by choosing gold as a safe option.

Importantly, large investors and portfolio managers are looking at gold as a monetary asset if invested in any of the three forms – gold exchange trade fund, futures trading on gold in a commodity exchange and buying physical gold.

The WGC report says that between April and June this year, gold investments in exchange traded funds (ETF) rose to 274 tonnes, said to be the second largest quarterly inflow. Other gold-related investments also drew similar attention.

The ETF is traded on the major stock exchanges such as New York Stock Exchange or NASDAQ. But the Amercian Stock Exchange (AMEX) is the primary trading venue for gold ETF funds. When one buys an ETF one invests in a conglomerate of companies. He owns gold shares without actually possessing the yellow metal but gets the benefit of the surge. This is a good instrument for those who cannot afford the price of 10 grams of gold. In India, seven mutual fund (MF) companies, including UTIMF, Kotak and SBIMF, have seen a huge growth in their gold ETF.

However, there are pitfalls too. There could be a sudden bubble burst leaving the investor with nothing. So large bodies do not treat this as a safe investment and prefer the physical possession. The WGC finds that after June, the ETF sales have plateaued.

A major reason stated to be behind the surge of gold prices is the cartel led by Bank of England, which has physical possession of gold and is in a position to manipulate the world market. The bulk of the gold at the Bank of England does not belong to England. It is Arab gold held as foreign depository, with London serving as a custodian. The market speculates that if the Anglo cartel continues with their activities, gold prices would break many records. This would make the world markets,already affected by several bank failures in 2008 more volatile.

The gold cartel is stated to be having an asset worth $ 2.6 billion. It has led to a trade war between what is called Eastern Alliance – largely a lose conglomerate of traders and bankers away from Europe and Anglo bankers. The cartel bids up the gold and silver price and demands physical delivery from the metal exchanges every 10 to 14 days. The alliance is trying for a break out in the precious metal price and from the Anglo finance-led gold cartel into a position they are stuck on the defensive. In the future it is expected to cause a difficult situation more so as the dollar loses its value.

But for the present the futures market which is controlled by the Anglo cartel is thriving. The investment demand for 2011 would remain healthy and favourable for a higher gold price. In fact, they are willing to pay a higher price each time. Many assets such as global equities and commodities underwent a period of turbulence, whereas gold price moved on a steady note. The eastern alliance is fledging and would need time to consolidate against the cartel.

The futures market in gold is worth Rs 25,000 crore daily in India. Bankers and fund managers are now eyeing the rural market. As the monsoon has been good, farmers too are expected to buy large quantity of gold. However, of late there has been some fall in gold sales in the country. More people have been selling their old gold jewellery.  Normally 30 per cent of gold is made available through such sales. It gives the jeweller a value worth 11 to 11.5 grams of gold sales – per deal, a profitable business.

Despite some volatility, gold is expected to remain an investment tool for the next couple of years, at least as long as the world currencies stabilise and gain confidence of the people or if there is a burst in the gold market. ---INFA

(Copyright, India News and Feature Alliance)