Since time immemorial, gold has never lost its lustre. And in uncertain times such as now, following the United States' creditworthiness rating downgrade, the glitter has become all the more resplendent, if prices are any indication. There is a rush for gold now as never seen before and it is likely to stay that way until the U.S. economy and the greenback are perceived to be in calmer waters.
With the heavy demand for gold ahead of the marriage season in India, coupled with a class of global and domestic investors seeking a safe haven for their investments which may have been battered in the equity markets, the price of the yellow metal breached the level of Rs.26,000 per 10 gm for the first time.
Since Standard & Poor's downgraded the U.S. rating by one notch, to AA+, putting the global financial and equity markets in a tailspin, gold prices here had been inching upwards daily over the past five days, and global cues led to a further surge.
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The prices of gold (99.9% & 99.5% purity) went up by Rs.215 each to touch a record high of Rs.26,055 and Rs.25,935 per 10 gm respectively.
The surge in prices is not surprising, considering the fact that the marriage season is round the corner and though Indians are one of the largest holders of gold globally on a household basis, the total demand is met through imports. In New York, gold price surged to a record $1,782.50 an ounce following the Federal Reserve System's resolve to keep its benchmark interest rate at a record low through mid-2013 at the least. Consequently, as a rush for cover, demand for gold soared and the trend may well be maintained in the near term.
Historically, investment in gold — although it is considered an idle asset — has always been to hedge against inflation and for protection against likely losses in other asset classes such as equity and commodities, and also as a risk cover against currency fluctuation. In India, where gold has always been considered a household security asset for uncertain times and an absolutely essential component of marriages, this section of consumers, especially the middle class, is in a quandary.
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Waiting for correction
For the average middle-class household, since the gold for marriage purposes is fixed on the basis of money to be spent and not the quantity to be procured, customers are said to be paring down their requirements by weight. The optimistic lot are delaying their purchases and waiting for a price correction.
Thus, even as a section of potential customers have put their purchases on hold, there is a profile of rich customers who are coming in to buy gold in search of making a quick buck.
And those who are diverting their funds from the equity markets are going in for exchange-traded fund (ETF) paper gold, which can be easily transacted though in stock markets.
Global gold prices have gone up by about 30 per cent this year and nearly 400 per cent over the past decade. Market observers speculate it could rise another 20-25 per cent. Much would depend on how soon the equity markets recover and that, in turn, would depend on the state of the U.S. economy. Once the markets recover, funds would move from gold to equities and the yellow metal may then partially lose its sheen.