Demand for gold set to remain strong

WANT GOLD?: People line up at a gold dealer's shop in Mumbai on Friday to sell their gold.  

Ramnath Subbu

MUMBAI: Even as gold prices zoomed past Rs. 7,300 per 10 gram and $488 per ounce last week, there are indications that the yellow metal could hold on to these levels in the near term.

World Gold Council (WGC) data reveal that in the first nine months of 2005, Indian demand was up at 645 tonnes (470 tonnes) and Indians bought 642 tonnes of the metal — more than the whole of last year. Besides, it is expected that with the festive and wedding seasons in full swing, the full year figure could well break the previous record of 795 tonnes in 1998.

With the U.S. dollar at a two-year high and oil prices having peaked, the alternative to investors seems to have been gold. Madhusudan Daga, Bullion Analyst and Consultant, Goldfield Mineral Services, attributed the spectacular rise to open speculative positions in the U.S. "This time the link between gold, oil and the U.S. dollar seems to have been broken. While gold has traditionally had a direct link with oil prices and an inverse one with the U.S. dollar, this time, gold has moved up in consonance with falling oil and rising dollar."

Investment demand up

In India, investment demand in the first nine months of 2005 was up 50 per cent at 105 tonnes (71 tonnes) and in the July-September period, it was up 56 per cent. Globally, the price moved up to $488 per ounce from $458 per ounce in July. Mr. Daga was confident that prices would cross the $500 per ounce mark by the year-end.

Sanjeev Agarwal, Managing Director, Indian Subcontinent, World Gold Council, "Gold has been on the up because over the last few years, with the U.S. dollar weakness and the huge deficit in the U.S., the investors have been looking at other options like housing, hedge funds and gold. Also, oil prices have moved up in last six months. In the short term a correction is taking place but overall, oil prices are up. Besides, there is a six-month lag between hike in oil prices and an inflationary impact and so gold has been seen as a means of diversification of portfolio."

According to the WGC, following the astonishing growth witnessed in the first half of 2005, when total consumer demand rose 55 per cent compared to the first half of 2004, Indian demand for gold in the third quarter "paused for breath." Investment growth was still in double digits but jewellery demand, although high, was essentially unchanged from the earlier year.

"The underlying prospects for gold in India remain very good. The economy continues to perform well, promotion is being sustained, new jewellery shops are opening and the generally good monsoon bodes well for rural incomes in the coming months," according to the WGC.

Further, according to Mr. Agarwal, Indian demand in the first three quarters of the current year has been exceptionally strong. There has been a slowdown in the last two months largely because of a wait-and-watch policy on the part of potential consumers. But investment demand has not been affected. "A clear indication of the bullishness is that there has been no significant increase in the sale of old gold jewellery on the reckoning that the prices will still hold strong for some time," Mr. Agarwal said.