There is no reason to fear a gold bubble: Ajay Mitra, World Gold Council

Last Updated: Fri, Aug 26, 2011 07:27 hrs

With gold prices hitting new highs everyday, the consumption demand in India is believed to stay firm, says Ajay Mitra, managing director (India, Middle East), World Gold Council (WGC), in an interaction with Rutam Vora. Edited excerpts:

Gold prices have risen sharply in recent weeks. There is a fear about this rally being a bubble that may burst soon. What is your view?
This argument is incorrect. At every stage people say gold is a bubble, but so far it has not happened. 

On the contrary, the two cultures of China and India are driving the gold demand. 

People in these countries have emerged from a mindset of scarcity and they consider gold a secure instrument to put their money in. They think the gold price this year is lower than that it will be next year, so even at persistently higher prices, people continue to buy gold.

If you look at gold prices rise since 2003, there has been a steady increase over the years and not a sudden one, as was seen in silver. 

In Images: We want gold!

Gold prices rose steadily from $352.1 an ounce (oz) in first quarter (January-March) of 2003 to $408 an oz in Q1 2004, and subsequently rose every year to reach at $908.4 an oz in Q1 2009 and $1,386.3 an oz in Q1 2011. Where is the bubble?

Is the current international scenario affecting gold prices? Is there a possibility of US selling its gold reserves to overcome its debt crisis?
The present international financial situation is a major concern. Not only the US, but European countries have also come under severe economic pressure. 

Many central banks of different countries have started gold purchases in order to strengthen their reserves. 

Banks in the US have the largest gold reserves in the world to the tune of about 3,000 tonnes, followed by China, where banks hold about 1,500 tonnes of gold in reserve. 

US is least likely to sell its gold reserves as doing so may create panic in the financial sector, which may lead to a sharp fall in its currency value. If global financial situation continues to remain grim, gold holding by central banks will rise that would further jack up prices.

Also See: Planning to invest in Gold ETFs? Wait!

We are getting a sense that the Reserve Bank of India(RBI) and ministry of finance are closely tracking gold movement. We cannot say whether RBI would buy gold or not, but they need to do something in gold reserves that can facilitate funding of infrastructure projects in India.

Have high prices affected the Indian gold demand?
India's gold market is different from anywhere else in the world. 

Gold demand here is not so price elastic. If we talk about the second quarter (April-June) this year, gold demand in the country has increased 38 per cent over the same period last year from 180.4 tonnes in Q2 2010 to 248.3 tonnes in Q2 2011. 

In value terms, demand has jumped 70 per cent from a total of Rs 31,730 crore in Q2 2010 to Rs 53,800 crore in Q2 2011.

What should people do at such high prices?
Consumers are in a similar situation to what they had faced during January-September 2009 during the global economic slowdown, when they had no idea about what to do with their money. 

They were confused whether to invest in assets or hold cash in banks as asset prices were tumbling. 

Now, the situation is slightly different, they are confused about whether to spend money or to invest because some assets are yielding attractive returns. 

In Images: Gold is back and for good

This is a difficult choice to make from spending or investing. But, we think prices may go upwards in the near months so consumers can decide based on that.

Has there been any change in the consumption pattern due to rising prices?
One strange trend we have observed recently, is that people are not willing to sell gold holdings even at such high prices. 

In Q1 of 2010, 14 tonnes of recycled gold came into the market, which rose to 20 tonnes in Q2 of the same year. But this year, so far in both, Q1 and Q2, the quantity of recycled gold entering market remained stable at 10 tonnes, which is actually surprising. 

This prevented scrap stocks coming in the market and added fuel to the rising gold prices.

What is the outlook for gold demand in the near future?
Considering the festive seasons during the next three months, we see prices remaining firm, with demand being strong both from investment as well as from jewelry. 

Inflation will remain the main factor pushing up gold demand even in the coming months.

 Other asset classes including equities, government securities and other commodities may not give high real returns considering macro economic factors like higher interest rates etc. Also, the monsoon has been good, which also creates positive sentiments for gold purchases.

More from Sify: