With as important a personality as Alan Greenspan of Federal Reserve, USA on the side of gold for the sake of financial discipline and advocating even the linking of dollar value to gold the future of gold cannot be as bleak and sombre as it is being portrayed by some of the new zealots of the currency supremacy in their latest utterances. Having been delinked from currency for a long time all the powerful countries of the world including the US and France still maintain large reserves of gold which they have little inclination to dispose off. Smaller central banks like the ones from Netherlands, Belgium, Canada and Australia have sold some quantities of gold which have resulted in a sharp fall in the prices of gold but that does not mean that they are going to remain depressed for ever and so also its demand.The demand for gold jewellery the world over is increasing and there has been a net 52 per cent rise in the consumption of gold jewellery between 1987 to 1996. In physical terms the gold jewelleryconsumed in 1987 stood at 2256 tons which rose to 3432 tons in 1996. There is a steady rise of 5 to 6 per cent in gold jewellery fabrication with the popularisation of catchy slogans such as "gold jewellery is an important part of a woman's total look". Gold jewellery has great patrons in the U.S. with 25 million gold addicted women who acquire at least one item of gold jewellery every year inspite of owning 16 items of gold jewellery already in their treasure trove.
While less and less people may agree to the idea that, "gold jewllery's investment potential is more important than its beauty" hardly 5 per cent sold gold jewellery when gold prices rose! The consecutive fall in gold prices has made it really impossible for anyone to consider gold as an investible proposition like US treasury bonds or even shares with Dow Jones touching 8000 mark every now and then.
But the recovery to gold prices will finally be lead by a persistent rise in its demand. 58,240 tons of gold is still in the form of goldjewellery the world over and it is 41 per cent more than what all the central banks put together hold in their vaults. It is unthinkable that at any given point of time all the central banks will put all their gold on the market. On the other hand there will be a constant increase in the demand for gold jewellery by 5 per cent or in absolute terms, anywhere between 175 tons to 200 tons per annum. Next 10 years there will be an additional demand for 2000 tons of gold for gold jewellery fabrication alone from what it is now. At present price level of gold many gold mines are closing down their operations. Where will the newly created demand for gold jewellery acquire its raw gold from? No amount of sale by the central banks can feed the ever growing demand of jewellery unless prices rise and supply level for gold itself increases.
Pushed by growing demand for gold jewellery the prices of gold once again reach their equilibrium level which will leave enough for all the players to thrive. Speculators can playwith the market in the short run but they can certainly not manipulate the fundamental equations of demand and supply which ultimately govern the price of a commodity.
Its not meant to be a case for increase in the gold price or a substantial rise in its demand much to the relief of uneconomical gold mines but it is a picture based on the simple calculations of the movements in demand and supply. The equation of demand and supply has a self correcting mechanism. Short term over supply of gold has created the present scenario where gold prices have tumbled down but a little long term scenario may not necessarily follow the same situation, more so when the demand for jewellery has a constant rate of growth and the increase in the supply of gold has an erratic nature about it. In 1996 alone 700 million people around the world bought a piece of gold jewellery. Already 3.5 billion people the world over own gold jewellery. With rising economic prosperity every one wants to own the real stuff. That's where theimmense popularity of gold jewellery lies. And who can beat a trend?
(The author is a consultant -- on gold and diamonds -- to the United Nations)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
