Gold skyrockets

Gold prices, having already hit an 18-year high, seem set to climb still higher. The uptrend is not confined to India, the world's largest consumer of gold, but is a global phenomenon. This surge defies many of the historical linkages that gold prices had developed with the major currencies, and even goes on to indicate new equations. It reflects in a way the role this precious metal is acquiring once again as a financial and insurance instrument. When viewed from this perspective, the causes of this bull run become obvious. For one, most hedge funds have begun to liquidate their exposure to energy stocks in the wake of crude oil prices sliding, and moved into gold. This reflects a new linkage between the prices of crude oil and gold. This is borne out also by the reports that many big funds have hiked their weighting for gold, copper and coffee in their investment portfolios, from 5 per cent to as much as 10 per cent or more. Moreover, investors in some West Asian countries, notably Bahrain and Kuwait, are reported to be shifting their focus from stocks to commodities, as valuations have become stretched.

The other important factor""also an indicator of a new trend""concerns movements in dollar and euro values. Conventionally, the dollar had a negative correlation with gold prices while the euro had a positive one. This had led gold prices to rise in the past whenever the dollar came under pressure. Gold prices and the euro, on the other hand, used to move in tandem. Since September, gold has been looking up despite a weakening dollar vis-à-vis the euro. This is a clear signal of a break in the greenback-gold link, as also of the reversal of the relationship between gold and the euro. For India, an additional factor that supported the gold price surge was the coinciding of the global price spiral with the domestic festival and marriage season high gold demand. The kind of consumer resistance that is normally noticed at higher price-ends was, therefore, not conspicuous this time.

Indeed, the genesis of the free run of international gold prices can be traced back to the 1970s, when the US stopped fixing the gold price to serve as a global bench-mark. Indeed, the official price was kept static at $20.67 an ounce for several decades before raising it to $35 in 1934. Subsequently, a two-tier pricing structure was also tried out from 1960 onwards, before finally unshackling the yellow metal completely. Of course, the policies of the central banks of major countries regarding their gold reserves and sales have continued to influence global prices. Of late, many of these banks have either halted or slowed down their sales. The central banks of the US and Europe are believed to be holding almost a fifth of the world's gold reserves. Some of the European banks have, of late, embarked upon the policy of limiting their bullion sale. In India, the Reserve Bank seems to be following a cautious approach towards gold and rightly so. For, here this metal doubles as an instrument of savings for common man and an investment avenue for retail investors, who hope to exchange it subsequently with more units of money than they paid to acquire it.