Gold losing its shine thanks to high prices

(DENNIS B MALLARI)   

Gold’s almost inexorable climb to a projected $1,000 per troy ounce is driving 49-year-old Sharda Mathur mad as she tries to celebrate her daughter’s impending marriage with the traditional pomp and glitter associated with the occasion in gold-crazy India.

“We started shopping for my daughter’s wedding jewellery last year. But it appeared that every time we visited Zaveri Bazaar [Mumbai’s gold market] the prices had escalated considerably.   

“Traditionally, an Indian bride adorns herself with gold jewellery on the day of her marriage. But at these prices, we may have to give way to a new and much cheaper tradition of shopping for fakes.”

But while India’s jewellery retailers hunt for a way to bounce back from their woes, the UAE market is playing its trump card – Dubai Shopping Festival.

Tawhid Abdullah, General Manager of the Dubai Gold and Jewellery Group and Chairman of Damas, recently told Reuters: “This year we expect gold sales to rise by almost 40 per cent during Dubai Shopping Festival. Last year, gold sales were up by more than 45 per cent during the festival period.”

But Abdullah agrees that the sales increase may hit a speed-bump if prices go higher, as buyers will need some time to adjust to the new price. “The price seems to be finally steadying, but we are still on tenterhooks until it drops below $900 an ounce,” said one Dubai-based retailer. “At the current rate, we have lost all hope of enticing the casual buyer. However, those who buy gold for weddings and other occasions are disappointed rather than deterred.”

In spite of the heightened anxiety, the local market has yet to lose its lustre as a regional gold hub. Traders said they expect gold jewellery retail demand will be upbeat even after the shopping festival if prices drop below $900 an ounce. And while the World Gold Council has refrained from predicting if prices will exceed $1,000 an ounce in the next few weeks, last year’s escalating prices haven’t affected Dubai’s gold imports, which rose 14.3 per cent to 559 tonnes in 2007, while exports rose 4.7 per cent to 287 tonnes, according to the Dubai Multi-Commodities Exchange.

On the global commodity markets, gold is being devoured by investors as a safe haven during this period of financial crisis driven by the sub-prime mortgage woes in the United States and the resultant global credit crunch, which is threatening to ignite the fires of recession. Investors are hoping to diversify their portfolios by adding more gold to reduce their overall investment risk.

Industry pundits are already predicting an even higher jump in gold prices over the next few weeks, especially in the wake of speculation that the 1.25 per cent cut in interest rates by the US Federal Reserve will not be enough to stave off a downturn in Western economies.

At the same time, oil prices are showing little sign of falling in sympathy, while South African goldmine closures and production delays are doing their bit to drive prices of the metal.

Colin Griffith, Chairman of Dubai Gold and Commodities Exchange, told Emirates Business in a recent interview: “It is almost impossible to judge where gold prices will go. It is on an upward trend. I have to say though that gold prices have now been going up for five years. Also, gold in the short term is a strong investment.”

But will long-term faith merit a similar gain? According to the World Gold Council, the precious metal has witnessed an annual increase of more than 37 per cent in comparison to January 2007’s average gold price of $631 an ounce.

Yet gold has failed to keep pace with the rate of inflation over recent decades. The average 1980 price of gold, when inflated to $2007, should be $1,563 an ounce – well above today’s prices.

While investors continue to debate this issue, the high prices have already started to affect gold jewellery buyers in Dubai, according to retailers and wholesalers for the precious metal.

Dubai is a long-established market for gold bullion and wholesale and retail jewellery, where the trade is fuelled by strong demand from the Arab world and India, the world’s number one gold market. The emirate’s bullion-sellers said key demand from Indian expatriates in the booming emirate and from leading importers in the Subcontinent has fallen in recent weeks despite the wedding season that begins mid-January and lasts until the end of February.

Astha Kohli, Marketing Manager for the WGC, said: “Normally, this is the most critical time for traders in the UAE. The surge in prices has left traders holding large volumes of excess inventory.”

Indian sales also witnessed a decline. October, a month that witnesses strong retail sales to coincide with the festival of Diwali, saw demand falling as much as 80 per cent compared to the same month in 2006.

Reasons behind the surge

The World Gold Council identified the following short-term reasons for the recent gold price rise:

 - Inflationary fears as a result of high oil prices. Gold is seen as a hedge against inflation; while its real value can vary in the short term, its purchasing power has remained stable over the centuries

 - Continued weakness in the dollar. Gold is a statistically proven hedge against fluctuations in the US dollar, the world’s main trading currency 

 - Unstable financial conditions. Gold is among only a handful of financial assets that are not matched by a liability. It can help to provide insurance against extreme movements in the value of traditional asset classes that can happen during unsettled times

These short-term factors have, however, occurred on top of longer-term movements in supply and demand fundamentals that have supported the rise in the price of gold since 2001:

 - Mine output: The gradual reduction of mine output in recent years, with only a small number of major gold finds by the mining industry, is constraining supply. The cost of extracting gold has also increased substantially in recent years

 - Jewellery demand: Strong economic growth and sustained promotion in the key gold jewellery markets of India, China and the Middle East are leading to strong demand for gold jewellery

 - Both institutional and retail investors are becoming increasingly familiar with gold’s portfolio diversification benefits. The reason for holding diverse investments is to protect it against fluctuations in the value of any single asset class. Portfolios that contain gold can be more robust and better able to cope with market uncertainties than those that do not