The price of gold is shooting upwards into uncharted territory, at levels never seen before according to one of India’s largest jewellery exporters. On Wednesday, its international price touched $1,350 an ounce, while the price in India was around `19,400 per 10 grammes. There’s no predicting how far it’ll soar, as the price of gold is inextricably linked to the dollar: the more the dollar weakens, the higher the price of gold will go. It’s really a currency play at the best of times, and the strength of gold reflects the weakness of the American currency. For instance, before the global financial crisis erupted in 2008, at the time of the sub-prime defaults of 2007 gold was selling at around $650 an ounce; today, three years later, they have more than doubled. This is another way of saying that the strength of the once-almighty dollar has halved against gold. The US currency’s weakness is almost in direct proportion to the very liberal stimulus packages announced by various governments in the developed world. They have been virtually printing notes with gay abandon in order to stoke their limp economies. And since there are no signs of developed economies showing any real strength and sovereign debts under strain in some European nations, the dollar is at the mercy of these stimulus packages. The United States might try to shift the blame on to the Chinese yuan and make it a scapegoat, but the current currency play is predicated largely on the huge stimulus packages — of the kind never seen in the recent history of these countries.
In this environment, record highs for gold are becoming almost routine as the metal continues to dazzle one and all — investors, speculators and buyers — across the world. It is the age-old asset to which people have always turned, particularly at times of political and social turmoil or in situations like today when currencies weaken. In fact, this year gold has outperformed both equities and bonds. Hedge funds too are now getting into the business of investing in gold — so there is also an element of speculation in the price of gold, as well as in several other commodities, from oil to copper and zinc. In India, which is the largest consumer of gold in the world and is said to have the largest hoard of gold, there is also a seasonal spurt in demand every year in the festival and marriage seasons. But India also has a certain advantage thanks to the strong rupee against the dollar. Gold watchers say the price in India will touch `20,000 per 10 grams by November, while the MCX commodities exchange projects December prices at `19,615 per 10 grams. But all this is guesswork, and some analysts claim there could even be a minor correction as such price levels could be unsustainable. While high prices might be good for investors and jewellers, consumers and individual buyers might resort to some resistance as they have in the past. While it is undeniable that this country has plenty of people with money — India has the fastest-growing number billionaires and millionaires worldwide — but even they may wince at such high prices. Thus the expectation of a “correction” in prices in the not-too distant future. In the short run, however, gold will certainly continue to appreciate — as more stimulus packages are rolled out and the US Federal Reserve keeps interest rates at zero, reducing the staying power of the dollar. Also, frenzied buying by investors will continue as gold remains undiminished as a symbol of wealth and a store of value, as it has throughout history.