It is just as well that the extraordinary bull run in gold has tapered off. India can scarcely afford further capital outflows on this count.

The US Federal Reserve’s latest money-printing stimulus programme to boost flagging growth has helped push up world gold prices close to $ 1,780 an ounce, a level not seen since end-February. Since the rupee has also shed almost a tenth against the dollar over this period, prices in India are now ruling at an all-time high of Rs 32,000 per 10 grams. But the trend seems unsustainable. For all the talk of QE3 – the Fed’s open-ended mortgage-backed security purchases of $ 40 billion a month – leading to a debasement of the dollar, the current global macroeconomic fundamentals do not really point to investors dumping fiat currencies for gold. Nor are there many takers for gold in India at current prices: The World Gold Council has estimated the country’s demand for the yellow metal, including for investment purposes, to have plunged by over 38 per cent during April-June, compared with the same quarter of last year.

What this indicates are two things. The first concerns affordability. At today’s rates, a gold ornament of 24 grams – three sovereigns – would cost roughly Rs one lakh, which is beyond the reach of most households. Second, the very fact that gold prices have more than doubled in the last three years makes it less attractive as an investment. After all, how much more can it rise, when there is already buyer resistance at current prices? There is no doubt that till last year, gold was much more than just a hedge against inflation. This was the case not only in India, but even globally, where the previous rounds of quantitative easing (QE1 and QE2) by the US Fed resulted in gold scaling the $ 1,000-an-ounce barrier in September 2009 and hitting a high of $ 1,920 on September 6, 2011. Since then, though, the sovereign debt crisis in the Euro area, a faltering recovery in the US and slowdown in emerging economies like China and India, have put brakes on a fresh bull run in gold, QE3 notwithstanding.

That may not be bad news for India, which, in 2011-12, imported over $56 billion worth of gold, accounting for a quarter of the world demand. While investing in gold may represent an act of savings at an individual level, it is, however, a source of capital outflow for the national economy. Moreover, gold, along with real estate, is also a source of ‘de-financialisation’ of household savings. The Reserve Bank of India’s data, in fact, shows net financial savings of households to have dropped by Rs 91,430 crore between 2009-10 and 2011-12, even as gold imports doubled over this period in dollar terms alone. We need schemes incentivising households to deposit their idle gold with banks, which can be used as repo collateral to augment their lendable resources. Only then would ‘savings’ in gold not be just a one-way import street.

(This article was published on September 18, 2012)
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