Wean people away from gold

Gold has been steadily losing its lustre in the international, and consequently in the Indian, markets for many weeks now. The precious metal has touched the lowest price levels it has seen in the last five years. This was about $ 1,070 per ounce. In India, the prices are hovering below Rs 25,000 per 10 grams. The extended and unrelenting decline cannot be explained in terms of the usual volatility or price cycles. Future prices have also shown a bearish trend with predictions that they may come down to the Rs 20,000-21,000 range. The Greek financial crisis and the convulsions in the Chinese stock market, which sent ripples across the world, should have made gold more attractive and pushed up its demand. But the prices continued to fall through these crises, sending a signal that it is not considered the safe haven in times of crisis and uncertainty, as in the past.

The main reason for the fall in gold prices is the prospect of an increase in the interest rates in the US. The US Federal Reserve has indicated that it would hike interest rates very soon. The US economy is in recovery mode and the dollar is getting stronger. Traditionally, high interest rates in the US and a strong dollar have always pushed down gold prices, perhaps because the dollar serves as a safe haven. The currency has the additional advantage that it is more liquid than gold. Inflation has been softening in all major economies and in the main gold-importing countries like India and China. This has also contributed to the diminished attraction for gold. While consumer demand has not declined in India, investment demand for gold is at a six-year low. In China, both types of demand have declined. India and China account for half of the demand for gold in the world.

The fall in prices has implications for India. Since about 10 per cent of the country’s import bill is accounted for by gold purchase, the fall in prices will reduce trade deficit and is therefore good for the economy. Internal demand has not gone up considerably because inflation is falling and there is expectation that the prices may fall further. Gold-based investment funds have less appeal now. The government should make use of this opportunity to wean people away from gold. It should make special efforts to push and implement the gold monetisation scheme which enables people to keep their gold in banks and earn interest on it. If some fine-tuning is needed to make the scheme more attractive, the government should do that.