The Hindu Business Line : A golden awakening

Swamiji smiled, "Ah! Gold. The metal that never corrodes or decomposes can never be created from other materials. Actually, even before paper currency was invented, gold was treated as a form of currency."

Joe looked puzzled. "Why is the price of gold so high? `Supply and demand' does not seem to be the main reason for the gold prices. In the past few years, the prices of all metals, including copper, steel, silver and gold, have risen sharply along with the prices of sugar, soybeans and oil. The sudden rise in industrial bases of China, India and four straight years of economic growth and the recovery of Japan have fuelled the boom in the commodity market.

"But gold prices are skyrocketing even though the demand has not increased a lot. Gold is not being used a lot in the industry. In the electronics industry, gold accounts for just 8 per cent of total gold demand. Even though the demand from the consumer is expected to go down in 2006, the price of gold is going higher."

Swamiji took him to the banks of the river Ganga. "Joe," he said, "You took time to understand certain things about gold, but did you take efforts to know why your wife is interested in gold?"

Joe remarked angrily. "It must be jewellery. What else? In fact, the biggest demand for gold, almost 70 per cent, comes from production and consumption of the jewellery, which is being used either as an investment or adornment. People in the Middle East and India use gold as investments and are very sensitive to prices. Adornment jewellery's core market is North America and Europe where the customers are less price sensitive than investment jewellery buyers."

Swamiji said: "You are in the yoga capital of the world. Why don't you meditate for a while? I will meet you after three days."

In California, Sue was at her wits' end. Through sobs, Sue told her mother, "Mom! I wished I explained more to Joe about my passion for gold.

Actually, in the recent years, inflation and currency depreciation in many of the developing countries have made it difficult for quite a few people to invest in banks.

Thus, gold is the alternative when the local currency loses its value so quickly.

"In fact, the properties of gold make it a perfect alternative to paper money that is backed by government. Even central banks do use gold as a reserve in times of crisis. Gold is one of the best forms of investments as it is both tangible and liquid, unlike real estate and equities or bonds. Real estate is tangible but not liquid and equities and bonds are liquid but not tangible."

"True," agreed Mom. "Last week, in the New York Mercantile Exchange, the price of gold, to be delivered in June 2006, hit a record $600 per ounce, marking a 25-year high. Sue, anyway, try to get in touch with Joe. You will be fine."

A few days later, Swamiji, seeing Joe's demeanour suitably mellowed, said, "Let me tell you about "I" or ego.

When it is vertical, it divides you. When it is horizontal, it acts as a bridge. For now, let's cross this Lakshman Jhoola and see what is in store on the other side of the bridge."

Nothing prepared Joe for the moment when he saw Sue. He had mixed feelings now. They rested near the Ganga and began talking.

Joe said, "Sue, I did some research on the Internet and found some reasons why gold price is high. Countries like Mali, Tanzania and Ghana get more income from the export of gold and it raises their standard of living. This income is also used for debt service payments and even a $10 fall in the gold price means a loss of $75 million export income, which is a huge amount for these countries. So, by keeping the prices of gold higher such countries' economy is made better."

Sue remarked, "Looks like you found financial awakening in the place that screams `spiritual awakening'.

Joe laughed, "Gold is also primarily used as an effective hedge against inflation. In general, when every country holds its surplus in US treasury bonds, rising interest rate creates fear among investors as this results in lower bond prices. Thus, in such times, instead of investing in US treasuries, major countries prefer to invest in gold. Another primary reason for them to do so is situations like war and unrest in the global world.

"Now, with the war in Iraq, and the dispute with Iran, the world is facing political instabilities — which might devalue major currencies like the US dollar and Euro. In such cases, gold is considered a safe bet as it never loses its value."

They walked for a while and Sue said, "This, I heard, is Bharat Mandir, the oldest temple in Rishikesh. Let me explain my interest in one of the oldest metals.

In the last 20 years, gold has neither shown any significant correlation to domestic and international equities, nor any correlation to US treasuries.

The reason that drives the prices for equities and bond markets are not the same as gold prices. Thus, gold is used as a great diversification to a portfolio by many investors.

"Most importantly, major investors in commodities use technical analysis for trading. In this analysis, the higher price indicates a better opportunity to buy at high and sell higher. Many investors believe that gold prices have not yet reached its peak and are still expected to go higher. Thus, they pour in money to invest in gold as it has significantly higher growth opportunities than equities."

Joe told her, "You know, it's believed that meditation in Rishikesh brings one closer to salvation. For me, it has brought me closer to Sue."

Not betraying that these words had melted her, Sue continued, "The major reason for the spike in gold prices is creation of two exchange-traded funds. This helps institutional and individual investors who want to buy and sell gold but do not want to go to the gold shop. The exchange-traded funds, iShares Comex Gold Trust and Streettracks Gold Shares, allow investors to buy and sell gold like stocks. However, the fund in turn buys the actual gold. The exchange traded funds, which didn't exist in 2002, bought 192 tonnes of gold in 2005 and are expected to demand a higher amount of gold for 2006.

"Sudden introduction of gold exchange-traded fund has brought in billions of dollars to be invested in gold, which wouldn't have been possible otherwise."

Joe, on their way back to US said, "You know when it all made sense? Alan Greenspan, during one of his recent speeches, was asked how he wanted to be paid, `Yen, Dollars or Euros?' He said, `I prefer gold'." Sue laughed.

Rishikesh, for a change, sent a couple home to embrace family life, as opposed to welcoming people who had renounced it.

The authors are publishers of www.wisepen.com

Racy@TheHindu.co.in

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