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Gold Rush

Gold prices in India are at a high. So, should you buy the metal or sell it?

By T.R. Vivek

Good as gold

If you had converted your investment portfolio to the yellow metal two years ago, you'd be laughing your way to the bank today. Consider this: worldwide, gold has been depressed since its peak in 1980, as financial systems took hold and central banks started dispensing with their absurd gold reserves. The conventional reasoning was that gold has had its days of glory, and would end as an anachronism. Gold prices in India remained artificially high for a long time, keeping smugglers and Ajit joke-crackers busy all through the 1980s. After India liberalised, prices started weakening -- and by the mid-1990s, it seemed that India would follow the global pattern of gold prices, which were seen to be in terminal decline. Central banks were keen to sell off their mega-tonnes, bit by bit, and gold investors started opting out -- while gold-consuming markets, such as jewellery-bedazzled South and West Asia, responded to the low prices with higher demand.

Then, suddenly, a two-decade-old trend started reversing. Internationally, having hit a low of $260 to the ounce in 2001, bullion price shot up -- and is hovering at $360 per ounce these days. India mirrored the pattern, though with a slight time lag. Gold has risen from Rs 4,800 per 10 grams in January 2002 to touch a six-year high of Rs 6,000 in December 2002.

Some investors have made a lot of money. First Eagle SoGen Gold Fund, a US-based fund that invests in gold, for example, has reported a gain of 110 per cent in 2002. But will the prices continue to rise? Is this a good time to buy, hold or sell the metal?

The first fact to recognise is that the reversal in the global trend has less to do with the very metal's intrinsic appeal, and more to do with global investment fears -- the lack of super-safe options. Gold is not just seen as the ultimate hyperinflation hedge, it is considered a primitive-state investment, as in, 'If civilisation were to start all over, what would you want to have?'

In other words, gold has been rising because of the fear that paper investments might fail. But in India, consumer demand is a big factor, so the marriage season towards the end of the year plays a role in raising prices. And most consumers don't expect a further rise in prices, and would rather buy gold as an investment. So, post-season, the price has slid a bit -- to Rs 5,680 per 100 grams.

"Consumers are skeptical about buying now," says Sanjay Kothari, Chairman, Gems and Jewellery Association of India. "A war would mean a further increase in prices," he admits, "But for the past three weeks, there has been some stabilisation. So this would be the best time to sell."

Another piece of reasoning is that the world economy's phase of uncertainty may be coming to an end soon. Globally-attuned analysts attribute the ascent of gold to such factors as a high US current account deficit, a weak dollar, poor equity markets, corporate misdemeanours and a bond market petering off (after a recent boom). If the US economy bounces back -- stimulated, for instance, by the US President's new fiscal measures -- and the Dow turns buoyant again, gold's rise could perhaps be arrested and even reversed. All, then, would be back to normal.

If that's the scenario you expect, this may be a good time to sell the gold that you're holding for purely investment purposes. You may not get a better price for a long time. Gilts may be a good option, meanwhile.

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