GOLD PRICES IN INDIA

1. INTRODUCTION
"Gold is a very solid asset. Buying physical gold does have advantages compared with other investments. Investments in gold-backed financial products and paper gold should be left up to the professionals," says Mark Robinson, a bullion analyst based in Dubai. Gold is the oldest precious metal known to man. Therefore, it is a timely subject for several reasons. It is the opinion of the more objective market experts that the traditional investment vehicles of stocks and bonds are in the areas of their all-time highs and may be due for a severe correction. To fully appreciate why 8,000 years of experience say " gold is forever", we should review why the world reveres what England's most famous economist, John Maynard Keynes, cynically called the "barbarous relic." Why gold is "good as gold" is an intriguing question. However, we think that the more pragmatic ancient Egyptians were perhaps more accurate in observing that gold's value was a function of its pleasing physical characteristics and its scarcity.

Gold is primarily a monetary asset and partly a commodity. More than two thirds of gold's total accumulated holdings account as 'value for investment' with central bank reserves, private players and high-carat Jewellery. Less than one third of gold's total accumulated holdings is as a 'commodity' for Jewellery in Western markets and usage in industry. The Gold market is highly liquid and gold held by central banks, other major institutions and retail Jewellery keep coming back to the market. Due to large stocks of Gold as against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets. South Africa is the world's largest gold producer with 394 tons in 2001, followed by US and Australia. India is the world's largest gold consumer with an annual demand of 800 tons.

Indian Gold Market

Let us at first take a look at the evolution of the Indian Gold Market. India was never in dearth of Gold Reserves. History had been a witness of the fact that India was always self sufficient in all its natural resources and more so in case of gold. It was this abundance in availability of such precious metals that lured foreign invaders from all parts of the globe as well as from time to time to come to India and plunder as much of it as was possible for them to do. However there were a significant number of such intruders who, after entering the country, fell for the land and its cultural heritage which eventually led them to settle and establish their empire in India. As a inevitable consequence of the lavish livelihood exhibited by the Indian rulers, the Gold reserves in India gradually diminished. The arrival of the British in the hierarchy in the middle of the eighteenth century announced the decline of India's Gold Reserves even further. The colonial status given to India by the British crippled the economy which once boasted of its wealth in gold. Huge quantities of the precious metal was carried to England right after their extraction. As a result a major proportion of India's Gold Reserves was 'vanishing' without even entering into the economy. By the time India gained independence, a huge vacuum had already been created as far as Gold Reserves in India was concerned. Slowly, after several decades have gone by India has finally started to fill up the vacuum in a big way. After reaching a new height in the form of 8 % growth in Gross Domestic Product (GDP ) for the year 2005-06, India is being recognized as one of the fastest emerging economies of the world. India's growing prospects can also be noticed in the gold market as well. India is viewed as the largest consumer of gold in recent times. According to the figures presented by the estimates of the World Gold Council (WGC), India's total demand for gold in the year 2001 was 243.2 tonnes which comprised 26.2 % of the total world demand. Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. India is the world's largest consumer of gold in jewellery as investment. In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. At present, 13 banks are active in the import of gold. This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001.

 The gold hoarding tendency is well ingrained in Indian society. Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewellery offtake is sensitive to price increases and even more so to volatility. In the cities gold is facing competition from the stock market and a wide range of consumer goods. Facilities for refining, assaying, making them into standard bars in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively. To sum up, the Indian Gold Market has a very bright future ahead. Who is the regulator? The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator.The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more selfregulating than stock exchanges. But this could change if retail participation in commodities grows substantially.

Who are the players in commodity derivatives? The commodities market will have three broad categories of market participants apart from brokers and the exchange administration - hedgers, speculators and arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators. Hedgers are essentially players with an underlying risk in a commodity - they may be either producers or consumers who want to transfer the price-risk onto the market. Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite. For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.

GOLD MARKET EXCHANNGES.

MCX (Multi Commodity Exchange):

Multi Commodity Exchange of India Ltd, (MCX) an independent and demutualised multi commodity exchange, has permanent recognition from the Government of India. MCX, a state-of-the-art nationwide, digital exchange facilitates online trading, clearing and settlement operations for a commodities futures trading. Key shareholders of MCX are Financial Technologies (India) Ltd, State Bank of India, Union Bank of India, Bank of India, Corporation Bank & Canara Bank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets and has successfully established a thriving digital market for trading in Gold, Silver, Steel, Kapas, Cotton, Rubber, Black Pepper, Oil & Oil Seeds, Ferrous and Non-Ferrous Metals, Agri Commodities, Pulses and Soft commodities MCX now stands amongst the top five bullion exchanges in the world and the largest gold futures exchange in India. Between November 11, 2003 and August 12, 2004, MCX has clocked a total Gold turnover of more than 340 tons valued at around Rs. 20,000 crores, which accounts for 90 per cent of the gold futures trading in the country. MCX offers two types of contract in Gold i.e. Gold (1 Kg) and Gold Mini (100 Gms) facilitating a large spectrum of market participants to do trading. MCX has also recorded Gold physical delivery in numerous contracts to the extent of 1.5 quintals.

FACTORS AFFECTING GOLD PRICES.

Historically, gold prices have reacted sharply to geo-political and economic shocks, inflationary fears, dipping supply and rising demand, a weak dollar and struggling equity markets. Be it the oil shocks of the 1970s or the 1980 invasion of Afghanistan or the reaction to the collapse of investment banks last year in every case, gold prices touched record highs. In March 2008 for example, gold touched all time highs of $1,023 an ounce (31 grams) following news of the collapse of Bear Stearns. Even in the current year, recessionary conditions and the global equity sell-offs have ensured firm gold prices with the average going at $900 to an ounce. While a weak dollar has been positive for gold and the yellow metal has a negative correlation with the dollar, currently both asset classes are in demand. Best among worst Gold has moved up by 33 per cent since November 1, 2008 and the dollar has been moving up against most currencies including the euro and the rupee. Says Manasee S Gokhale, economist, NCDEX, With few other options available and as long as other currencies are falling, dollar would continue to strengthen. Despite the poor fundamentals of the US economy and a yawning fiscal deficit, institutions have been buying dollars, as it is considered the better bet among weak currencies. However, till that happens, the key reason for gold prices moving up will neither be dollars, external shocks or the falling equity markets, but as an investment option with investors seeking assets which have minimal risk, offer stable returns and have low price volatility. The gold rush Jewellery demand in India has always been the key demand driver making up over two-thirds of total global demand for gold. This has, however, changed dramatically over the last one year due to increase in investment demand worldwide. In 2007, jewellery in terms of volumes accounted for 68 per cent of demand while investments had a share of 19 per cent (rest used for industrial and dental purposes). A year on, investment demand has shot up 64 per cent in volume terms, especially in the last two quarters of 2008, (See chart: Gold demand) with investors snapping up a 1,000 tonnes of gold. Share of investments now account for 30 per cent; that of jewellery has fallen to 58 per cent.

In addition to retail consumption of gold coins and bars shooting up, investments in exchange traded funds (ETFs) have also seen a rise. Unlike the situation in India where gold ETFs have a miniscule five tonnes of gold with them, ETFs such as the NYSE-listed SPDR saw its gold holdings jump 14 per cent in one month to nearly 1,000 tonnes (See graph: ETFs in vogue) which is more than what India, the largest consumer of gold, imports in a year. Will this trend continue? Dharmesh Sodah of the trade body World Gold Council believes that while there will be profit-taking, the assets under management of US-based ETFs have been increasing due to the lack of alternative investments making them sticky. In India, the movement has not been as dramatic. Says Gokhale, ETFs are a new concept in India and are likely to do well over the next two years once investors can see a record of stable returns. Demand in the short term, however, is likely to be hit due to the prevailing high prices. Experts expect a rally in April (the Akshya Tritya festival pushes up gold sales) after which gold might stay down. An upward movement post September (start of the wedding season) could be seen with gold likely to touch about $1,100 levels in a year.