With the decline of domestic prices, gold investors are having a tough time. For them, the year 1997 is perhaps the worst in the last five decades. Gold prices have declined by 30 per cent in the last 24-month and are perilously close to its five-year low. The reason is not because of poor offtake in the domestic market. On the contrary, the gold consumption has been on the rise. In 1996 alone, the country consumed 430 tonnes of the yellow metal. These figures are expected to touch 500 tonnes in the current year. The expectations of gold buying to escape the VDIS route will also give a boost to demand.

Since the domestic production is not even one per cent of the total consumption, the domestic gold prices are linked to the international prices as almost a 100 per cent requirement of gold is met by imports. And, with international gold prices having touched a new 12-year low of $308 per ounce, the domestic price has also dipped to Rs 4,285 per 10 gm.

While the depressed international scenario has been the prime reason for declining gold prices, other factors have also played their role. One of them has been the dollar-rupee parity. Unlike in the earlier years, the value of rupee has not fallen much in the last two years. As such, a stronger rupee seems to have reduced the premium on domestic prices.

In fact, till recently, almost 90 per cent of the gold was being smuggled into the country due to import restrictions. But, the removal of the Gold Control Act and liberalisation not only ensured easy supply of gold in the market, but has also curbed smuggling to a great extent. Under the liberalisation policy, NRIs were allowed to bring in up to 5 kg of gold on payment of a duty equivalent to Rs 220 per 10 gm in 1992. As a result, the official gold imports jumped to 100 tonnes in 1992, showing an impressive increase of more than 800 per cent on a year-on-year basis. The introduction of SIL in 1994 further boosted the official gold imports.

As a result, the share of smuggled gold fell from 90 per cent in 1992 to 25 per cent in 1996. Very recently, the DGFT has also allowed import of gold for sale in domestic market by 12 designated agencies.

As a result of this, the cost of importing gold has been reduced drastically, which, to some extent, has affected domestic gold prices. Thus, no matter at what rate the domestic demand goes up, the local prices will be dominated by the international scenario, which is currently not in the favour of gold buying.

Consider this: The world mine production stood at 2,346 tonnes last year, as against 2,269 tonnes in the previous year, registering a 3.39 per cent jump which has been the highest in the last seven years. Demand has also risen, especially from the Asian markets, but the liquidation by several central banks have affected the prices. All this was started in March last year when the Belgian central bank announced a sale of gold. This had a negative impact on the gold markets. Add to this was the radical announcement by the Swiss National Bank of changing its passive policy on gold.

The end of the last year saw a Dutch sale, which was announced in January this year. In July 1997, a 160-tonne gold (4.58 per cent of the world annual supply) sale by the Australian central bank was also one of the major blows. And the latest shock has been the Swiss Bank's proposal to support its currency by a 1600-tonne gold sale by 1999. As a consequence, gold touched a new 12-year low of $308 per ounce.

For the future, a bullish world gold market needs strong demand growth, rise in investment buying and minimum supply from banks. While the first factor probably behave in favour of gold, the market cannot afford to have fresh supply from banks. More than the price damage, this has been affecting the sentiment badly, affecting the investment buying, which is already at low levels.

In fact, the year 1996 witnessed a net Western disinvestment of 163 tonne, outside Europe and North America. Bar hoardings fell by 41 per cent to 182 tonnes -- the second lowest level in the last 10 years.

This trend appears to dispel the perception of gold as an investment alternative world over. And nobody is to blame. The price of gold (in real terms, CPI deflated constant 1996 money), has declined sharply in the last couple of years. From an average price of $1,169 per ounce in 1980 to $387 per ounce. These factors would continue to affect the sentiment in the gold market.

Although the rising demand from the Asian countries, especially India, will positively affect the prices, in the long run, scenario for gold appears bearish.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.