JOIN USGold prices are ruling high in spite of the small declines in the last few days. The precious commodity has been on a sustained uptrend in the last many years because of the problems in the world economy and lack of confidence of investors in the financial markets.
The price of gold has doubled in the last three years in both international and domestic markets while other investment avenues like stock markets and real estate have performed poorly. The US Federal Reserve’s recently announced stimulus programme and the European central bank’s bailout action plan have actually prompted the latest spurt in gold prices. Since interest rates are low in developed markets gold offers itself as a safe haven by providing a wall against value erosion. Even central banks are buying gold.
In India, which is the world’s highest importer and consumer of gold, the prices are near all-time highs of Rs 32,000 for 10 grams. The high levels of inflation have made gold more attractive. In the immediate future the price may go still higher because of the spurt in demand during the coming festival and wedding seasons.
But consumer resistance may also be setting in. The import of gold declined earlier this year in terms of quantity as a result of the high prices and some disincentivising steps taken by the government and the RBI. But the fall has to be seen in the context of the doubling of imports in the previous two years. The coming weeks may not see much relief though in the longer term the high prices may not be sustainable. The revival of the stock markets may also see the diversion of some funds which may other have gone into gold.
While it is agreed that gold is the most unproductive investment which sets the national economy back by using up about a third of the total household savings, it is difficult to make a big dent in its demand because of the strong intrinsic and emotional reasons. Social and individual attitudes have to be changed through effective public campaigns but this may take time. Other savings instruments should be made more accessible to people, especially in rural areas. In fact even proper awareness about such avenues of investment is lacking. Banks and financial institutions can also plan new schemes which will make use of the horde of gold in the country for productive purposes.