Gold prices in India have gained 4.8 per cent to increase to an average Rs 28,536 for 10 gram in the second quarter of this year. The rise was despite prices dropping 4 per cent to $1,598 an ounce in the London PM fix. The average closing price in the second quarter was up three per cent to Rs 27,994 in the second quarter.
The contradictory trend was largely due to 10 per cent depreciation in value of rupee against dollar. Gold prices are prone to huge swings due to the fluctuating rupee.
Gold prices in China, fast emerging to topple India as the largest consumer of the yellow metal, dipped three per cent to 3270 yuan for 10 gm. Prices were more or less stable in yuan term with the average gold prices in the second quarter at 3280 yuan, down four per cent compared with the same quarter last year.
STAGFLATION IN INDIA
The slowdown in Europe has spilled over to the US and the UK and has affected demand from emerging markets. The effects of the global slowdown are evident across India, China, Brazil and Russia through both domestic growth and local prices, said a World Gold Council report.
“India currently faces a bout of stagflation (high inflation coupled with slower economic growth) as supply side factors and currency weakness has supported sticky inflation,” said the report.
It is not a simple task to estimate how long this higher inflation environment will last. However, prices should stabilise as consumer demand slows, as has occurred in other countries, it said.
INFLATION TO SUPPORT GOLD
Deflationary concerns in some countries provide room for further fiscal and monetary stimulus. This may lead to a further fall in value of currencies through unconventional monetary policy and increase risk of future inflation. These factors should provide support for future gold investment.
The flight to the dollar in the first half of 2012 could reverse in coming days. This may bring some challenges to the dollar that could prevent continuation of the consistent inflows it has experienced so far.
The US debt ceiling debate in the third quarter and federal elections in November, followed by the necessity to confront a $1.3 trillion budget deficit will prove challenging to the dollar. Therefore, WGC expect gold’s correlation to most assets to remain low and gold to act as a currency hedge in the international monetary system, particularly against the dollar.