Amidst all the chaos and uncertainty that engulfed the global financial markets, ordinary investors and governments alike turned to the sanctuary of gold. That response is not uncommon: during the previous crises — for example, the global financial meltdown of 2008 — gold benefited as equity stock prices sank. However, even after normalcy returned and stocks rallied, the price of gold did not fall back as one would expect. It seems likely that investors, traumatised by the crisis, were not fully convinced of the sustainability of the recovery and continued to keep a part of their money in recession-proof assets, of which gold ranks very high. That, however, cannot explain the phenomenal worldwide demand for gold in recent weeks and the consequent spike in its prices. Setting new records practically every day, gold touched an all-time high of $1,900 an ounce on Tuesday as investors, spooked by the prospect of a return to recession, sought out safety in the precious metal. Gold prices have more than doubled since the recession began in 2007. They have risen by 19 per cent since June when the eurozone debt crisis grew in intensity and threatened to spill over into its stronger economies.
Economic uncertainty has always added lustre to gold in the eyes of investors, and in recent weeks there has been no shortage of unsettling developments. The downgrade of the U.S. sovereign debt, after its politicians nearly drove the country to the brink of a default, was one significant upheaval. And by the close of last week came reports that pointed to a sharp economic slowdown in the developed countries. While gold has always won the vote of investors seeking safety from turbulent financial markets, the sharp rise in prices has now brought on a new set of buyers, those who take high risks for quick returns. Demand has come from yet another direction: Central banks in developing countries are switching their currency reserves to gold. Purchases by the world's central banks more than quadrupled during April-June this year over that a year ago. In India and some other countries gold is, of course, much more than an investment opportunity or a currency substitute. Ahead of the festival season, the demand from the jewellery industry has risen to unprecedented levels. Investment opportunities in gold and gold-backed instruments have been expanding in the country. Some non-banking finance companies in Kerala have seen an explosive growth in gold loan business. But, as this much-sought-after metal bounces along another volatile phase, the gold loan boom points to the risks ahead as much as to the potential.