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What you should know about gold price crash
While international prices of gold remain weak, there is a sense of relief in India. A sharp fall in gold prices is good news for Indian gold consumers and the economy.
Here are pointers that you need to know:
India biggest consumer of gold: Every tradition in India involves give and take of gold. The fascination of gold in India is not new. Indians own 18,000 tons of gold worth a staggering $ 1 trillion, according to estimates of World Gold Council. This is a tenth of the gold held in the world. For those wanting to spend, gold prices at current levels could be an attractive proposition. This benefits consumers and jewelers selling to them.
Low gold prices good for economy:India’s gold imports for 9 months to December 2012 stood at $ 37.6bn. India’s overall trade deficit (excess of import over exports) stood at $147bn. Gold accounts for over a quarter of the trade deficit. This results in current account deficit surging to a new high of 6.7% of gross domestic product. This occurs when a country owes more money in foreign exchange than it receives. A high current account deficit exerts pressure on the rupee as the demand for foreign exchange rises. This means people sell the rupee and buy more of the foreign currency. It increases money supply and causes inflation. A fall in gold prices stalls this cycle.
Gold as investment: The Economic Survey for 2012-13 highlights that an investment in gold gave a 23.7% average annual return between April 2007 and March 2012. This is against 7.3% return on NSE Nifty and 8.2% return on savings bank deposit. The surge in gold prices was partly due to this appetite to hold gold as an investment. International trend suggests that in US, investors have moved to equity markets with benchmark indices soaring to new highs. Troubled countries like Cyprus have said they would sell gold. This indicates that investors are confident about future returns in assets other than gold.
Gold loans: Over the years, people have borrowed money and raised cash from banks and non-banking finance companies. According to Kotak Securities estimates, so far 621 tonnes out of 18,000 tonnes of gold was pledged by Indians. Banks have disbursed loans to the tune of Rs 1,21,000 crore against gold worth Rs 1,86,200 crore. A sharp fall in gold prices could trigger a further pressure on gold prices. This is because lenders would ask borrowers to bring in more security to keep their loans. There is also a possibility that lenders could sell some gold to recover loans.
Gold exchange traded funds in India manage assets worth Rs 11,648 crore, according to Association of Mutual Funds in India data. For five years to 2012, assets under management for gold exchange traded funds doubled every year. However, investors turned cautious over the past one year. Total assets under management grew only 18%, according to a report on
www.wsj.com . This clearly shows that investors already got cautious on gold.