Naveen Mathur

The global economic crisis and the resultant volatility have led to the need for diversification of portfolios and increased the importance of risk management. It's during such times that gold's fundamental characteristics stand out as a hedge against inflation and preserver of wealth.

Besides, there is a continued erosion of purchasing power of the world's key currencies, rising inflation and, of late, the sovereign debt crisis in the Eurozone. Little wonder then that the metal has risen since 2002.

According to the World Gold Council's (WGC) latest report, the global demand in the second quarter of 2012-13 stood at 990 tonne, down 7% on a year-on-year basis due to the weak demand in jewellery, investment and technology. The net buying trend by banks, which started in the second quarter of 2009, continued in this quarter as well. The demand by central banks and official institutions in the developing countries increased 63% to 157.5 tonne. Gold's cultural heartland, India and China, continued to dominate the consumer demand segment, contributing 45% to the total jewellery, bar and coin demand.

The consumer demand for gold in China for the second quarter of 2012 was 145 tonne, down 7% y-o-y due to the economic slowdown and lack of a clear price trend. In the first quarter of 2012, the demand rose to a record 255.2 tonne, overtaking that of India. In India, the monetary tightening, rapid depreciation of the rupee against the dollar, economic slowdown, stubborn inflation, high interest rates and fear of weak monsoons curtailed the gold demand as prices touched a record high of Rs 31,422 per 10 gm.

The upward trend has continued since 2000 and gold has performed well compared with other asset classes, with a CAGR of 17% from 2000 through 2011 and a notable 22% during 2010 and 2011. Gold has posted a 13% year-to-date return, whereas the Sensex yielded 12% during this period.

India's gold imports rose to 969 tonne, amounting to $60 billion in 2011-12, pushing the current account deficit to a record $78.2 billion, 4.2% of the GDP, due to the rupee depreciation. This prompted the government to hike import duty on gold to 4% of the value in March 2012. Since then, gold imports have declined 37% to 131 tonne during April-June 2012, according to the WGC report. The consumer demand stood at 181.3 tonne for the second quarter of 2012, down 38% on a y-o-y basis. However, the assets under management of the 14 gold ETFs in India touched Rs 10,300 crore in May 2012, from Rs 5,463 crore a year ago. However, according to GFMS, the imports to India may fall 26% to 650-750 tonne in 2012.

Gold prices inched to an all-time high at just above $1,920 per ounce in September 2011 amid concerns about western economies. Since the beginning of the year, the US Dollar Index has strengthened, adversely impacting the prices in global markets.

Read Article In its entirety.