Gold Hits Record High In India

May 4, 2012 at 11:15

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Gold hit a record high in India on Thursday at Rs 29,695 per ten grams. Gold prices are sluggish in international markets and are expected to rise only if global economic situation worsens. The sharp fall in the value of the Indian rupee is making the most lucrative commodity expensive for Indians. Yet, Indians are increasingly buying gold to hedge against inflation and the falling currency. The preference for gold over other investment avenues is a cause of concern as it expands trade and current account deficit and hurts growth. It is also a statement by investors that they see the Indian economy faltering going forward.

The following pointers would help you comprehend this trend:

The sharp rupee fall: India imports about 800 tonnes of gold each year. The price of gold for Indians will rise as rupee touches a new low against the US dollar. This could act as a natural trigger for reducing gold demand. However, pundits say that the worsening situation of the Indian economy could see rupee falling to below Rs 55 to US dollar. If this trend continues then investors would continue to use gold as a hedge against the falling currency.

• Indian economy falters: India’s economic fundamentals have weakened over the last four years, leaving the country with slowing growth, sticky inflation and large fiscal and current account deficits. “The “2Gs” – government and governance deficits – are the root cause, in our view,” said Nomura, a Japanese bank in a note on Thursday. This has resulted in household savings move from financial assets into physical assets like gold. In 2011, over 13 per cent of household savings were in physical assets. This is against only 10.5 per cent of household savings in physical assets in 2008.

Indian Investors prefer gold: The average assets under management or AUM, for gold exchange traded funds, doubled to Rs 9,620 crore for the year ended March 2012, according to Sebi data. Investors either saw value of their investment fall in equity funds or pulled money out of them during the same period.

Global trend different: International investors are looking at other avenues than gold indicating a reduced threat to the world economy. SPDR Gold Trust, the world’s biggest gold-backed exchange-traded fund, said its holdings fell 0.47 percent from the previous session to 1,278.32 tonnes by April 30, the lowest since mid-February, Reuters reported recently. Total holdings in gold ETFs fell 1 percent from a peak hit in mid-March to 70.129 million ounces by April 27 — the lowest in nearly three months, showing stagnating investor interest in bullion.

• No good news on economy ahead: Indians buying gold over other investments indicates the lack of confidence in the economy. Those buying gold for investment are saying that they do not see prospects improving. A survey of 500 corporate executives on Thursday said that the India’s macroeconomic conditions are likely to either worsen or remain the same in the current quarter, indicating weak business sentiments. International investors, Reserve Bank of India, credit rating agencies, economists, analysts are consistently warning the Indian government over poor economic and fiscal management. The noise is only getting louder.