GOLD PROVING IT'S METAL...

MARIAM NASIR
Manager Research

July 30 - Aug 05, 2007

Gold is a precious metal that has been valued by people since ancient times. People use gold for coins, jewelry, ornaments, and many industrial purposes. The global paper currency system is very young. Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system. Up 1971, there has never in history been an era when no paper currency was linked to Gold. The history of money is replete with instances of coin clipping, printing, debt defaults, and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose Gold backing remained intact. All of the economic, monetary, and financial upheaval of the past 30 years is a direct result of this fact.

Prices of the gold in the Pakistani market have risen in double digits over the years except in 2004. On an average over the years (2002-2007) return on investment in the commodity has been around 20%. By far now in 2007* (Jan-June 2007), the return on gold has been more than 28%. Despite high prices at current levels people continue to invest in the commodity as it is a safe haven in the time of uncertainty and crisis. 

IMPORT OF GOLD

The rising domestic consumption of gold has led to recovery in the yellow metal's import despite higher prices in the global bullion exchanges. According to data released by the Federal Bureau of Statistics, in the nine months from July to March 2006-07, the gold import plunged as 8,600 kg worth Rs9,401 million were imported compared to 25,538 kg worth Rs23,477 million in the same period of the previous fiscal 2005-06. On a month on month basis gold import surged to 184 kg worth Rs217 million during March compared to February when only 12 kg worth Rs14 million were imported due to higher prices and imposition of withholding tax on the bullion trade. The demand of the precious metal is high owing to the current marriage season. To meet the demand, however, gold is also being smuggled from Dubai in a big quantity. Meanwhile, the export of jewellery dipped to Rs120 million in March against Rs368 million in February, recording a fall of Rs248 million.

GLOBAL SUPPLY AND DEMAND Q1 AND YEAR 2007

Global demand for gold reached $17.4bn in Q1 2007, more than double the level of four years earlier and 22% higher, in dollar terms, than in the first quarter of 2006. In tonnage terms total demand was 4% higher than Q1 2006. Jewellery demand was 17% higher in tonnage terms than the weak Q1 2006 and 38% higher in dollar terms. Strong economic growth and the wedding season played a role here but an important factor was consumers' acceptance of prices above $650/oz. At 211 tonnes, demand in the quarter was just six tonnes short of the previous first quarter peak in 2001 when prices were less than half today's levels.

ROLE PLAYED BY GOLD

Gold as a preserver of value: Gold is an effective hedge against inflation. In addition, gold is inversely correlated to the dollar, making it a good currency hedge. As an asset class, gold has all the advantages of being universally regarded as a currency, without what are all too often the disadvantages of being subject to the economic and monetary policies of one particular country's government.

Gold's value as an effective portfolio diversifier: Gold is a highly effective portfolio diversifier due to its low to negative correlation with all major asset classes. Over the last 20 years, gold has shown no statistically significant correlation with equities. That applies not just to domestic equities, but also to international equities. Gold has also shown no statistically significant correlation with other mainstream asset classes, such as US Government bonds, Treasury Bills, and equity real estate investment trusts. The fundamental reason for this lack of correlation is that the factors driving the gold price are not the same as the factors that determine the returns on other assets.

Gold's value as a currency reserve: Gold is still considered an important reserve asset by most central banks, even though it is no longer the center of the international financial system. The most important reason is that gold is the only reserve asset that is no one's liability. This means that, unlike a currency, the value of gold cannot be affected by the economic policies of the issuing country or undermined by inflation in that country. Gold has a track record of holding its real value over the centuries. Since gold is no-one's liability, it can not be repudiated and holding it is a safeguard against potential unforeseen crises.

Gold's value in industrial applications: Gold ranks among the most high-tech of metals, performing vital functions in many areas of everyday life. Gold's unique properties make it useful in medical applications, pollution control, air bags, mobile telephones, laptop computers, space travel, and many other things we consider indispensable to our modern lives.

OUTLOOK

Investments in Gold continue to provide the individuals as well as institution with a safe haven in the time of uncertainty and crisis. Recently, the much-awaited country's first electronic commodity trading platform - National Commodity Exchange Limited formally started operation and gold, as a first commodity was traded on the board. NCEL is the first commodity exchange of the country set up for the trading of the commodities. In the first phase of trading, gold has been selected, while other commodities including rice, cotton and wheat would be trade later.