Gold prices in India – time to rush in ?

Internationally, gold prices have risen strongly since 1999. Today’s spot price is the range of US$ 735 per ounce. It must be remembered that despite this rise, prices have not reached the peak reached in 1980 (US$ 850 per ounce on 21 January 1980). Recent price rise appears to be driven by global financial worries, lowering US interest rates and strong demand in China and India.

Gold prices in India are expected to continue rising. ICICI Bank is reportedly pricing gold at approximately Rs 9550 per 10 gms. Spot price of gold today (8.10.2007) on MCX (Multi Commodity Exchange of India Limited) was at Rs 9461 per 10 gms, while the 05 Dec 2007 contract is priced at Rs 9510 and a 05 Apr 2008 contract priced at around Rs 9715. Some commentators expect gold prices to touch Rs 9800 by December 2007.

Resident Indians and NRI, both maintain a keen interest in gold due to social reasons. However, if this expected price rise is seen as a reason to rush in and buy gold for investment – investors need to stop and consider for a moment that the expected price rise in India is equivalent to a 10.5% pa growth rate. India bank deposits (e.g. with SBI, HDFC Bank) can get you more than 9 % pa and therefore a 10.5% return on an asset class where prices fluctuate seems moderate.

There has also been a perception that gold acts as a long term natural hedge against inflation. Data from the US does not necessarily support this assumption. If gold prices were to have kept pace with US inflation since Jan 1980, current price should have been US$ 2100 per ounce!

Indian investors should also be aware, that while gold prices in dollars could strengthen, a weakening dollar could mean a slower rise in gold prices in rupee terms. Some are expecting the Indian rupee (INR) to get to Rs 39 per US Dollar by December 2007, which in itself could create additional challenges for the Indian economy.