Very recently, gold prices touched a new high of $1430.95 a troy ounce in the international markets. Since 2001, they have risen by as much as 450 per cent. This phenomenal rise is reshaping demand and supply in several fundamental ways. In the process, age-old perceptions and habits concerning the yellow metal are set to change across the world. While the surge in gold prices has been a universal phenomenon, the contributory factors differed as between the developed countries and certain developing ones, notably India. In the West, the rising prices have drawn speculative investors to bullion, driving its price even higher. Simultaneously, the demand from the jewellery industry has fallen. The main reason is that the high price of gold has dampened consumer demand, especially at a time when economic recovery after the crisis is weak. Although it need not necessarily be a secular, irreversible trend, the jewellery industry in the West is seeking to cut its gold consumption by substituting it, wherever possible, with silver and non-precious metals. For the first time in 30 years, investment overtook jewellery in 2009 as the biggest source of demand for the yellow metal. Extreme volatility in the financial markets, economic uncertainty, and fears that national currencies will lose their value have all driven investors to go for gold bars and coins, gold-backed bank deposits as well as exchange-traded funds. This demand surge spurred the creation of new gold-based financial instruments.
However, in India and some other Asian countries, jewellery-making, the traditional backbone of the gold market, has remained strong. According to the World Gold Council, the overall demand rose 79 per cent to 650 tonnes during the period January-September 2010, compared with the same period in 2009. Demand from jewellery-makers has been particularly strong. The investment demand for gold is also on the ascendant. Even as banks sell gold in the form of bars and coins, investments in paper gold too are becoming popular. Gold-backed exchange-traded funds have been posting robust returns. Most fund-managers have been recommending investment in paper gold, alongside investments in equities and debt. It seems a matter of time before paper gold, including gold futures, gained greater popularity and became more accessible to ordinary investors. For a long time in India, gold — especially as jewellery — has been viewed as a hedge against inflation. Banks and other financial institutions, who have always been sanctioning loans against pledges of gold, need to do much more to integrate gold investments with the mainstream financial markets.