Weak rupee pushes gold prices to new highs

Perceptions drive markets and also asset prices. Last year, on August 22, the spot price of gold touched an all-time high of $1,911 per ounce (28.35 gm) in international markets.

Back home, gold prices made headlines as they started inching over Rs 28,000 per ten grams. Internationally, gold prices saw a near $400 increase since the beginning of July 2011. The reasons were many - from uncertainty around global equity markets and poor visibility on US economic recovery to lack of clarity on the trouble in the euro zone. Gold was then the safe-haven for investors.

Domestic gold prices are making headlines again, crossing the Rs 30,000 mark. But this time round the international price lacks the lusture. At $1635.58 per ounce, international spot prices are down by over 14 per cent from the August 2011 highs.

Fundamental reasons in India however do not support an increase in price. According to World Gold Council, during the quarter ended December 31, 2011, jewellery consumption in India fell by 44 per cent to 103 tons, while demand for gold bars and coins shrunk by 38 per cent to 70 tons. And subsequently, in the first quarter of 2012, ended March 31, Indian consumer demand for gold as an investment saw an annual fall of 46 per cent at 56 tonnes against 103 tonnes a year ago.

Therefore, it is the weak rupee which justifies the spurt in domestic gold prices. While international gold prices saw a 14 per cent decline from the highs of August 2011, the rupee depreciated by over 21 per cent during the same period. From Rs 45.94 a dollar on August 22 last year, the rupee on June 6 quoted Rs 55.61 a dollar, after touching a life-time low of Rs 56.51 a week ago.

At Rs 30,295 per 10 grams, domestic gold prices have shot up by over 7 per cent compared to the August 2011 levels even though the investment share of total Indian gold demand fell from 40 per cent in 2011 to 27 per cent in quarter-ended March 2012.