Low Demand Robs Gold of its Sheen

     Print Edition: March 2013

Gold had been on an unabated rise for the last 10 years. The metal has delivered a compounded annual return of 25 per cent since 2008.

Of late, the metal isn't all that glittery. Gold exchange-traded funds (ETFs) underperformed other assets in the year ended February 2013. Gold ETFs' annual yield averaged around 7 per cent, as against the broader market's 10 per cent and income mutual funds' 10.4 per cent.

"This can be attributed to investors' fears about rising prices and their doubts on whether the gold's performance will be sustainable," says Naveen Mathur, director, commodities, Angel Broking, a brokerage firm.

The demand for gold in India declined by 12 per cent to 864 tonnes in 2012 from 986 tonnes in 2011. Global demand also declined (4,405 tonnes in 2012, 4 per cent lower than 2011).

The country's affinity for the metal has increased its current account deficit, which reached an all-time high of 5.4 per cent of its gross domestic product in 2012.

In order to ease the situation, the government recently increased the import duty on gold to 6 per cent, discouraging investment in gold. However, it is unlikely to have a major impact on demand.

The Reserve Bank of India (RBI) has also pitched in by allowing gold ETFs to invest up to 20 per cent of their assets under management in gold deposit schemes of banks. It will allow mutual funds to lend their physical gold to banks, which will lower gold imports. The RBI has also asked banks not to grant loans for buying gold.

"Gold is likely to remain rangebound this year between Rs 29,500 (per 10g) and Rs 31,500. Crude oil has not been too volatile, neither has inflation been too high globally. These factors have limited gold's power as a hedge against inflation," says Mathur.

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