Sucheta Dalal :The global bull run in gold
Sucheta Dalal

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The global bull run in gold  

Nov 22, 2004

Thanks to the worsened US situation, continued war in Iraq and steep rise in oil prices

At the end of November last year, gold prices in India had soared past Rs 6,000 for 10 grams. At that time, I had quoted Richard Russell, an octogenarian international forecaster who wrote, “There are a few times in an investors life when the opportunity for huge profits lies ahead. Such periods in the stockmarket occurred in 1932, 1942, 1949, 1974 and 1980-82. People who loaded up with common stocks at those times and held those stocks made fortunes. I believe another such a time is now. And I’m referring to the current young bull market in gold.” Russell said in his newsletter, “I believe gold below and even somewhat above $400 an ounce is dirt cheap.” He insisted that it is the cheapest thing going over a five-year period.  

The reason: The US government, states, cities, corporations and individuals are currently loaded with $32 trillion in debt. On top of that, the US government has additional unfunded liabilities of around $44 trillion, all of which will have to financed. One year later, a worsened US situation, the continued war in Iraq and steep oil prices have seen a whole phalanx of economists, central bankers and policymakers saying the same thing even more emphatically.

At a time when the world has begun to question the dollar standard introduced in 1971 and is actively discussing a return to the gold standard, we as holders of nearly 10% of the world’s gold need to communicate this debate to a nation full of gold devotees. Especially since the production and supply of gold in 2003 was lower than the previous year, while the price of the yellow metal and demand for it rose.

Listen to some voices reported by The Daily Reckoning (a highly regarded investment newsletter) in the last week: “I have not come to praise the dollar, but to bury it,” James Grant proclaimed to the attendees of last week’s New Orleans Investment Conference. “I am bearish on the dollar and bullish on the thing that glints in the sunlight, is recoverable at five parts per billion from the earth’s crust and has no central banker,” he said, making a case for gold ownership and against the dollar.

Although gold prices fell even after America’s economic situation had deteriorated, Grant thinks, “foreign central banks may soon begin to disgorge some of the hefty dollar reserves on which they are now choking.”

Doug Casey, author of the bestselling Crisis Investing, has been predicting a bull run in gold since 2001-02 as a core holding. Last week, he told an investor, “Get your dollars out of America, before America gets your dollars out of you,” when the investor asked how much of his networth he should invest in foreign currencies. Casey says, “savvy investors, both here and abroad, have begun taking positions in gold and other ‘tangible’ assets.” And his recommended investments in gold exploration and mining companies have shown handsome price appreciation.

Yet, when world prices soared to a 16-year high and the domestic gold price shot past Rs 6,500 this Diwali, some Indian jewellers and experts (not all) were exhorting people to sell their hoard of gold and cash out. This is mischievous and misleading, but the advice probably sprang out of sheer ignorance. In a nation of gold worshippers, media reports of such advice should be reason enough for the government to push for much more sophistication in the gold market and a steady flow of information on the global demand-supply situation.

• With 10% world’s reserves, we’ve a stake in the return to a gold standard

• Govt must push for more sophistication in the gold market and better data flow

• Attractive bonds are needed so that our dormant gold stocks are utilised

Curiously enough, the gold business and investment pattern is changing, but much of the improvement is limited to metro areas. For instance, the new multi-commodity bourses have shown a healthy interest in gold futures trading. But gold prices in India are not directly in sync with international trends, because the same reason that created the gold bull market — dollar’s decline — has also led to a stronger rupee, leading to a slower rise in the rupee price of imported gold.

The retail buying pattern has also changed. For instance, well-known gold expert Madhusudan Daga says many well-to-do families now prefer to buy 24 -carat gold coins/biscuits from banks as investment and their women are happy to sport artificial jewellery or diamonds. He reports a brisk sale of gold biscuits this Diwali and poor sales of gold jewellery.

However, in the smaller towns and villages, jewellers continue to take advantage of buyers by cheating on purity and weight. The gold trade also remains the biggest clearing house for the black money of politicians, government officials and businessmen. And that is probably the biggest reason why the government has never been able to put India’s hidden hoard of gold (which is estimated at anywhere between 10,000 to 15,000 tonne held by individual families) to productive use.

If the Planning Commission wants to use part of India’s $120 billion forex reserves for infrastructure development, how much more important is it to find a way to bring the $200 billion worth of individual gold reserves into the open, especially when there are no signs that it will lose its lustre in a hurry?

Globally, gold broke through the $430 an ounce barrier, mainly on reports that a new exchange traded fund for gold, backed by the World Gold Council, was soon to be listed on the New York Stock Exchange. The security called TRACKS is designed as an alternative to investing in physical gold for easier access to retail investors.

India probably needs a different instrument. We have had a long tradition of retail investment in gold and it is easy to purchase or sell even tiny quantities of gold. Instead of hoarding gold coins or biscuits, India needs to push hard for investment in attractive gold bonds, so that the dormant wealth can be put to productive use. We also need to educate Indian on how to invest safely in gold, without necessarily holding the metal in physical form.

-- Sucheta Dalal