The yellow metal has proven to be price-inelastic in India. Despite the sharp spurt (of 23 per cent) in gold prices during April-June 2011, the demand for gold has risen by 38 per cent to 248.3 tonnes from 180.4 tonnes in the comparable previous quarter.

“The demand is driven predominantly by investment,” says Mr Ajay Mitra, Managing Director (India – Middle East), World Gold Council.

In value terms, the demand has jumped 70 per cent to Rs 53,800 crore during the period from Rs 31,730 crore in the previous period.

Substantiating that the rally was investment-driven, Mr Mitra said while jewellery demand during 2011 second quarter surged 17.1 per cent to 139.8 tonnes, investment demand shot up 78 per cent to 108.5 tonnes.

The average price during the quarter waas up to Rs 22,195 for 10 grams of 24 carat gold from Rs 18,052 in the same previous quarter.

Asked if the current price trend could be a bubble, Mr Mitra said this is not a short-term trend driven by transient market forces. Gold prices have been building up steadily for 10 consecutive years, underpinned by strong and diverse fundamentals. While the price of gold has continued its upward trend during 2010 and into 2011, analysis shows that, by historical standards, “its price is not overvalued relative to other assets,” he observes.

Globally, the central banks have started buying gold to strengthen their reserves. If the global financial situation continues to remain grim, gold holdings by central banks will rise which, in turn, will push up prices further, he says.

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