Yellow Fever

As recent gold price movements clearly show, in times of trouble, the average human falls back on the oldest investment instrument of all. In a year—January 1995 to January 1996—gold prices have shot up by over 17 per cent, from Rs 4,650 per 10 gm to Rs 5,480 for standard 24-carat gold. This, while the Bombay Stock Exchange index dropped by over 25 per cent, and real estate prices in Bombay fell by over 28 per cent.

Says Shantilal Sonawala, president emeritus of the Bombay Bullion Association: "The middle class and the investing public which were enamoured by the hype of the stock exchanges and real estate have lost a lot of money. Though investments in gold and silver do not pay interest, more people are realising that it is a better investment, both in terms of appreciation and security. A depreciating rupee in an unstable economic and political condition where large deficit financing, deficit budget and deficit balance of payments are making investors jittery—enough reason for gold to be considered the safest bet in these times."?

Even for the world's largest consumer of gold, India's hunger for the precious metal has been growing by leaps and bounds in the last few years. Consumption grew from 350 tonnes in 1992 to 475 tonnes in 1994. Sonawala estimates the 1995 figure to be over 500 tonnes. Says he: "In our country, gold is not merely for display, it is the most liquid form of investment. The rural population prefers to save their earnings in gold to hedge against the vagaries of natural factors like monsoon and drought. Also, economic liberalisation has pumped a lot of money into the system. A substantial part of this has gone into gold consumption." According to RBI statistics, almost 25 percent of all investment is in gold and silver, while share securities account for 6-7 per cent and real estate claims 5-6 per cent of investment. This does not include the unaccounted money which goes into gold.

India mines only 2-3 tonnes of gold in a good year. Almost 200 tonnes of gold is officially imported. Around 60-70 tonnes of gold is recycled, and the rest of the demand—about 200 tonnes—is met by the smuggler. This dependence on foreign gold, coupled with the increasingly panic-driven hunt for a safe investment, is responsible for the present rally in gold prices.

After two years of stagnation below the US $400-an-ounce level, international gold prices last month reached a five-year high of US $405. The reasons: South Africa's gold mining production plunged to its lowest level since 1957 owing to high production costs and low ore grade, and gold has caught the fancy of fund managers abroad. Says jeweller Ramesh Pahaljani: "Gold is increasingly being added in the portfolio of investment managers all over the world. Gold provides a vital balance to paper assets by reducing overall portfolio volatility." And even as the dollar price of gold is rising, the rupee is falling against the dollar, giving an impetus to rising Indian prices.

The World Gold Council (WGC) is adding fuel to fire by trying, along with the Bombay Bullion Association, to increase consumption. Says M.L. Damani, president of the Bullion Association: "We have requested the Union Government to accept the Kabra Committee report and introduce futures trading in bullion and commodities. Our demand for the reintroduction of the Gold Bond Scheme is still pending. The first launch of this scheme on March 15, 1993, netted the Government 41 tonnes of gold against an expectation of about eight tonnes." The Association is also pushing for a gold depository scheme.

The WGC plans to introduce the Gold Accumulation Plan (GAP), a highly successful scheme for acquiring gold on a regular basis for fixed-income small investors, pioneered in Japan in the '80s. Explains Shekhar Nerala, manager, WGC Bombay: "If an investor puts in Rs 12,000 a year, the agency—a jeweller or banker—will buy Rs 40 worth of gold (assuming 300 working days) on his behalf each day at that day's price. At year-end, the applicant gets gold accumulated over 300 days whose value is often much more than the initial investment."

Say the price moves from Rs 500 per gm on day one to Rs 600 on day two and to Rs 400 on day three. If a person has invested Rs 3 lakh for the year, the GAP agency will buy Rs 1,000 worth of gold each day. So on day one, it buys 2 gm, on day two, 1.67 gm, and on day three, 2.5 gm. Total: 6.16 gm at an average acquisition price of Rs 487 pergm, while the average market price for these three days has been Rs 500. The obvious merit of the GAP is that even a small amount of money can be invested regularly over a long period of time so that the risk of price fluctuations can be mitigated. In the long run, the GAP buys more gold for one's money. Says Nerala: "By this year, GAP will be available to Indian investors in some form or other." Adds Pahlajani: "We are consideringthe introduction of such a scheme here. If one invests in gold biscuits, chances of poor quality and adulteration are eliminated."

?And no one expects the price spiral to change direction. Says Sonawala, "If the rupee continues sliding at its current pace, gold prices may shoot beyond the Rs 6,000 per 10 gm mark in the next few months." Adds Pahaljani, "If the weddings and festivities during the third quarter of this year add to the demand, investments in gold and silver may give returns of 15 per cent a year." Compare that to the current state of the bourses and Bombay real estate prices