Gold 'Hallmarking' in India

Indian gold traders and jewellers are protesting the impending 'Hallmarking' regulations. Hallmarking is the process by which jewellers will have to certify the purity of gold they sell in jewellery. This regulation is expected to come into force on 1 January 2008. Traders/jewellers are up in arms claiming that the regulations have been put together without consulting them and operational issues such as limited testing centres will make it very onerous for them. In addition, they are not happy with the penalties suggested in the regulation.

This is obviously an excellent regulation from a consumer perspective. Resistance from traders/jewellers is to be expected. However, the government must persevere to create this much needed transparency for consumers.

India gold price lull

Gold prices have softened in India. This has been driven by global cues of weaker crude prices, some stabilization is USD and falling global stock markets - all of which has led to some amount of profit booking in global markets. In India, end of the Diwali season has also seen a drop in demand for physical gold, though some traders believe that customers would be back after Labh Pacham which falls this Wednesday.

Traders and jewellers also expect that customers may trade in their old gold jewelry for new ones to limit impact of the recent high prices.

India gold purchase: could end use be insurance ?

Gold prices continue to rise. On Friday, gold surged past US$ 800 per ounce in New York. Factors supporting rise in gold prices include:

• Rising oil prices
• Financial worries in the US
• Inflation concerns
• Weakness in US dollar
• Geopolitical concerns
• Potential shortage of physical supplies to back paper traded gold
• Continuing physical demand from countries like India.

Despite this rise, prices have not reached the peak reached in 1980 (US$ 850 per ounce on 21 January 1980). However, some market analysts now feel that gold could test these levels. Newmont Mining Corp predicted, two years ago, that gold prices could touch US$ 1000 per ounce !

On the other hand, some technical analysts suggest that gold is in an overbought position and could weaken should US dollar strengthen. Supports are at US$ 802, 797 and 785. Resistances are at US$ 823, 850 868.

If your risk appetite is low and are buying gold this Diwali season (whether resident Indians or NRI), you may be better off buying it for end-use where you can handle volatility as opposed to buying it purely for speculation. If prices continue to go up, the end-use nature would lock in notional profits, but if prices were to fall, the longer term holding nature of end-use may act as insurance against value loss.

People who have the stomach may opt to continue trading based on macro economic situation and technicals – however, as always, this will require keeping a close eye on gold markets to ensure that proper loss protection devices are put in place.

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.