Gold prices in India closed at an all-time high on Friday at Rs 7,900 per ten gram, in tune with a global Bull Run in the coveted yellow metal. Spiralling gold prices had given the jitters to lakhs of Indian households as wedding budgets went awry during the marriage season. For the first time in recent years, people are actually staying away from jewellery stores and 60 per cent of reported demand is for re-designing existing jewellery.
However, the pressure to meet the diktats of custom and tradition remains high. So every Indian wants to know if these gold prices are sustainable.
What is driving the upward march in gold prices? When will the bull run peak? Is it time to bring out the family cache and book a profit in the hope that prices will fall? Or, will the high price teach Indians to love gold a little less and focus on other investment opportunities? Let’s look at the situation.
Pan African Investment and Research Services (Pairs), a financial services group headed up by Dr Iraj Abedian, says that the price of gold could rise to US$600/oz by June 2006, (reports www.fin24.co.za). The group says that the heated gold market does not represent a temporary spike but is part of a ‘‘fundamental structural change’’. This is attributed to factors such as big decline in world gold production, increased demand from developing countries such as India and China and higher cost of exploration and creating fresh mining capacity for gold.
The view is endorsed by Mark Wellesley-Wood, Chief Executive of DRD Gold who is quoted by The Daily Reckoning as saying, ‘‘Expenditure on exploration peaked in gold mining in 1997 and has been pretty flat since then. There are 29 new gold mines in the pipeline right now and even if all these are developed, it would require a further seven projects every year to make up the deficit.” There is also another view that increased investment by Exchange Traded Funds played a role in driving up gold prices.
This scenario is interesting; but one must remember that one big new discovery can change future price projections in hurry. The same can happen with a steady change in consumption or holding patterns of individuals and central banks of countries. Let’s first look at the consumption pattern. India accounts for a quarter of the worlds gold demand and at 800 tonnes a year is its biggest consumer. Our consumption rose a massive 47 per cent last fiscal, probably because a chunk of increased middle-class income was invested in gold. Most of Indian demand is met through imports; China’s consumption was also high last year at 14 per cent. Consequently, the World Gold Council estimates global demand at 4000 tonnes, while the supply is in the region of 2250 tonnes.
What happens if Indians, the biggest gold consumers in the world stop buying as much gold? Madhusudan Daga, India’s leading gold expert insists that the consumption pattern in India is indeed changing. The 76-year-old Daga who remains a peripatetic traveler and constantly visits every gold and jewellery centre in the country points to two trends.
First, that physical investment is slowly switching from jewellery to gold coins, especially in tiny denomination. Secondly, there is an increasing acceptance of gold-plated jewellery. He says that jewelers are doing roaring business in one popular version where copper jewellery is coated with one gram of 24 carat gold. This has a turnover in excess of Rs one crore.
The increase in gold consumption last year showed no indication of changed preferences, but it is possible that consumption would have been even higher if Indians were not buying artificial jewellery. On the supply side, India has two gold producing mines in Karnataka of which Kolar is shut and Hutti generates a small steady supply. Apart from this, Hindalco produces gold as a by-product of copper mining.
India has a long and rich history of mining precious metals and diamonds, but much of this tradition shrivelled up due to nationalisation and a lack of fresh investment n exploration and technology. All that changed with the decision to permit Foreign Direct Investment in mining and exploration. But although FDI in mining was permitted in 1993, the government took a very long time in framing policy and reconnaissance permits were granted only towards the turn of the century.
Several parts of India, especially the Hutti and Dharwar Craton belt in Karnataka and parts of Central and East India are increasingly considered good prospects for small mines producing the yellow metal and diamonds with the use of new mining and prospecting technology.
Internationally, the rise in mining costs and expensive labour charges has made gold exploration unattractive. But the Indian situation is different. Labour is cheap in the mineral rich States and a change in government policy on mining and mineral exploration has opened up interesting possibilities.
Deccan Gold a listed company has tied up with the diamond giant DTC for an exploration joint venture after speaking to several international mining houses, says Daga. The arrangement is that Deccan will keep the gold that is found and DTC will claim diamonds. The company has also obtained 28 prospecting permits in a subsidiary company.
Top investment bankers in India, Canada and UK are also looking closely at investing in gold exploration projects in India. Although the process of getting permission for exploration followed by a prospecting license and later a mining lease is still excruciatingly slow and tedious there is steady progress. Central banks of countries hold large gold reserves and a couple of them have reportedly enhanced their holding last year (Argentina and Russia are examples). These banks could easily step in to cool the market by cashing some of their excess gold reserves at high prices and increasing supply.
All this suggests that the Bull Run in gold is set to continue over the short term unless a new mining discovery of change in consumption and holding pattern changes the outlook for gold.