Major reason for the price hike of the commodity is nothing but the geopolitical uncertainty

May 08 - May 14, 2006

Henry Ford, the founder of Ford Motors, once concluded that 'gold is the most useless thing in the world'. Gold has also been named as 'dead and non-productive asset'. At present, however, the yellow metal has become the focus of attention across the globe. Surging gold prices have allured the investors from across the world. According to one estimate $11 billion were invested in gold last year. There are manifold reasons for the price hike of the commodity but one of the major reasons widely quoted is that of oil prices. Since the returns against the investment in the commodity are very lucrative, there seems to be unabated interest by the investors. It is being presumed that investors and fund managers are buying the commodity because of geopolitical uncertainty, high energy prices and the dollar's weak outlook. Investors seem to have switched from traditional securities into gold in the hope of huge returns and they have got success as well. Those who predicted the rising prices of the commodity have benefited themselves at the end of the day. If we look at the prices of gold in last few years, we would find that the prices have soared exponentially in the international and local markets. In 1970, the price of gold was $35 an ounce. However, gold touched $850 an ounce in January 1980. In 1990s, yellow metal was sold for $ 252 an ounce. In September, 2002 gold prices were $330 an ounce. In November, 2004 gold soared above $450 an ounce for the first time in 16 years and last week the prices surged to over $656.60 an ounce. In December last year when gold hit $500 an ounce, the shrewd investors with excellent analysis foresaw the gold prices soaring in the days to come. Within just five months the prices have increased by over $156.60 an ounce, an unprecedented increase since 1980.

To me the major reason for the price hike of the commodity is nothing but the geopolitical uncertainty. Today, I relate it to the on-going tussle between Iran and the Western world and there were times when I related it to the geopolitical tensions by virtue of North Korean nuke issues and war with Iraq when the yellow metal hit $390 an ounce. The belligerent approach by the US has brought about the uncertainty across the world. The dollar has weakened and being the leading economy currency, a weak dollar has made the yellow metal cheaper for holders of other currencies and resultantly the demand has augmented unabated. It is to be remembered that a strong dollar limits demand for gold as a currency alternative. Three big economies of the world, China, India and Japan, have helped the prices of the commodity shoot up. The Indian economy is growing at 10 percent and the purchasing power of the Indians has increased which has led to the high demand by the Indians. Chinese economy grew by 10.2 percent in the first three months of the current year which is another reason for the high demand of the commodity. The Japanese investors are among the most active buyers of the yellow metal. Apart from this Russia, Argentina and South Africa have indicated interest in increasing their gold holdings. Interest rates have been raised from 1.1 percent to 4.5 percent in the USA in less than two years. High interest rates and soaring inflation in the United States have brought about more interest by the investors which will help the gold prices soar in future. Hefty investment has been witnessed by the US investors in the commodity as well.

Gold whether you call it 'the most useless thing in the world' or 'the dead and non-productive asset' is an asset which has proved quite helpful in some of the high profile instances in the world. India was saved in 1990 from default due to its gold reserves. The official gold reserves helped India to tide over its foreign exchange crisis in 1991. South Korea's currency stabilized when the government collected gold from their citizens to back their currency in 1997.

Central Banks maintain the gold reserves across the world. There were times when a number of Central Banks sold off huge chunks of their gold reserves and the international price of gold fell. Recently many European central banks have sold over 100 tons since September but prices continue the upward move. According to one source it was widely thought that the Soviet State Bank had large reserves of gold in the world but after the fall of the communists in 1991, the Soviet State Bank had a hearty laugh; it had no gold stocks at all.

According to a leading local newspaper the 100 per cent increase in bullion prices in the last six years has also benefited the State Bank Pakistan to some extent. The price of gold reserves held by the central bank, which was Rs47.5 billion during July-June 2003-2004, rose to Rs54 billion during the same period of this year due to increase in prices. It is known that the gold reserves have been same for last many years as the Bank does not buy or sell the yellow metal from its reserves. The increase in reserves is, however, due to the price hike in the bullion market. Lately, it was announced that foreign exchange reserves of Pakistan stand at $13 billion.

South Africa, the leading producer of gold, produces 72% of the gold in the world and depends on gold sales to balance her budget. The biggest beneficiary of the soaring prices should of course be South Africa as the global demand soared by over 16 per cent last year and the gold prices have surged by 16% in the first three months of the current year.

According to the World Gold Council Report, India stands as the world's largest single market for gold consumption. The estimated imports into India in 2002 were about 415 tonnes and total demand was about 800 tonnes. Total world demand for 2002 was about 3200 tonnes. I suppose that at present, India, a bullion superpower, must be importing over 1200 tonnes per annum. Gold is a popular investment for many reasons in India today as it is an integral part of social and religious customs and is a form of saving.

In our country where over a quarter of the population is poor, the current prices are far beyond the affordability of millions of citizens. The local prices of gold in line with the international prices have shot up exponentially. In the first week of December last year per 10 grams gold prices were Rs9, 865. However, in the last week of the last month, the prices were focus of attention of all and sundry. Gold price per 10 grams was Rs12445 on April 30, 2006. This has led and will lead to the fall in demand of the product. With the fall in demand, there will be fall in import of the commodity. And because of the fall in import of the product, the government will lose revenue of millions of rupees.

I presume that invest in gold at present is extremely prudent and is an excellent way of asset diversification. You can safely invest in gold.