BOMBAY, 11 October 2004 — An Indian can live anywhere in the world but the fascination for the yellow metal, gold, which has been passed on to him from various generations before him, continues to live on. Infact, this fascination seems to be growing.

Indians need just a small pretext to buy gold. Be it a birthday, engagement, wedding, birth or even death, gold forms an integral ingredient of all rituals. And now is the season when gold sales peak.

The season of festivals heralds the season of more buying. Demand for jewelry in India picked up in August ahead of the Hindu festival season, which peaks with Diwali, the festival of lights, in November.

Moreover, the US economic slowdown and consequent weakening of the dollar, high crude oil prices, ongoing terrorist concerns and run up to the US presidential election, all these facts have made gold a more safe haven of investment. Demand for gold bars and coins has increased because of its value of providing stability and security to the overall investments.

Consumption of gold in India increased by ten percent to 343 tons during the first half of 2004 against 312 tons same period last year. Demand for jewelry was higher by seven percent in tonnage terms and higher by 17 percent in rupee terms in the first half of 2004 compared to the same period in 2003.

The current oil-driven crisis in the world economy is leading to a simultaneous hike in international gold prices.

Higher oil prices are seen benefiting gold as it is considered an inflation-hedge. Investor interest will be in an asset that can hold its value against inflation, and gold comes as the unanimous investment choice during uncertainties.

Demand for gold is outstripping supply. The total world supply of gold, after adding old scrap and central bank sales, was down almost 10 percent in the first half of 2004 compared with the same period last year. In contrast, total demand was up 10 percent in the same period in 2004, with demand for bars and coins higher by a huge 40 percent over last year.

Demand for jewelry in India shot up by 21 percent to 119 tons during the first quarter of the current year over previous year’s Q1 demand of 98 tons. Total demand for gold jewelry including net retail investment rallied by 25 percent to 149 tons from the previous year’s figure of 119 percent, the World Gold Council report stated. Investment in gold in the form of bars and coins also shot up by a whopping 47 percent to 25 tons during the first quarter of the current fiscal as against 17 tons the previous year.

Yet, there are many analysts who say that this peaking of the gold prices is a temporary phenomena as a recovery in global growth prospects will put gold under pressure again, more so once the US presidential elections are over and the dollar manages to stabilize. The current bull rally in gold, is much more focused on immediate events rather than a continuation.

This is reiterated further by a report by Barclays Capital which has forecast strong global economic growth led by the US, by the end of this year and into 2005. This supports a recovery in the US dollar, particularly against the euro over the coming 12 months. Based on this report analysts say that gold prices will be markedly lower in 2005 until inflation becomes a larger threat.

The report states that there will be a surplus of gold in 2005. Average price for the year is forecast at $350/oz. For 2006, on current reckoning, the average price is forecast at $370/oz. On the other hand, for the current year, Barclays Capital expects the average price to be $400/oz.

With India being the world’s biggest importer of gold, biggest consumer of gold jewelry and also the largest scrap market for old gold jewelry, it would have been expected that India would have an impact on the world gold prices. Sadly, this is not so. India is merely a market factor helping to guide world prices.

So why is India unable to have an impact on the world gold prices? Analysts say that there are inherent “technical” factors like gold tends not to be in an internationally marketable form; legislation considers gold as a ‘commodity’ and not a ‘currency’; and there is no clear benchmark price.

Indians now have futures trading in gold in a couple of nationwide exchanges, yet international knowledge and recognition of these exchanges was very low.