Investing in Gold

The sky is falling for India’s rupee, which has fallen 20.1% since the start of this year. The currency has slumped the most in two decades to a record low in the wake of government’s economic mismanagement and failure to tackle deteriorating infrastructure. The frightening slide in the currency has conversely led to a incredible hike in demand for gold in India. According to the World Gold Council, in the first half of 2013, India accounted for a staggering 28% of global consumer demand. The 566.5 tonnes of gold bought by Indians way surpassed Americans’ 83.4 tonnes purchased.

The reason why Indians crave for gold is because consumers buy the yellow metal for auspicious reason during their wedding and festival season, which will start in November and last till January. It is estimated that Indian household currently hold 31,000 tonnes of gold worth a massive USD$1.3 trillion at USD$1400 per ounce. In order to reduce its trade deficit, Indian government has been trying hard to curb gold imports by hiking the metal’s import taxes.

Import duties were raised to 6% in late January and then 8% in early June and then subsequently 10% in August. The same tax is also applicable to silver and platinum to fight substitution. Despite these measures, Indians are still buying gold aggressively. The tariffs have only fuelled a boom in gold smuggling!

Since United States started its quantitative easing (QE) program, interest rates all over the world remain low. Logically speaking, given the low interest rates environment, inflation should hike due to the decrease in purchasing power of currency. Nevertheless, the hyperinflation has not taken place as expected, according to official data released by various governments. Well, only if you choose to believe in the statistics compiled. According to Arabian Money, there is rising cost in supermarket items from Austria to Canada and United Kingdom. Entrances to attractions were up by 20 per cent within two years in Vancouver.

In view of the possible unwinding of the QE program by Fed in this quarter, one major concern is that interest rates may go up and cause gold prices to down because of the higher dollar. However, history proved otherwise. In 2003 – 2006, interest rates were similarly going up from record low. At that same time, gold prices rose by 60 per cent. Gold was going for USD$400 per ounce and everyone was so sure that no way could it go further up any more. Of course, gold went on to reach a record USD$1900 in 2012. Ultimately, investors should note that if interest rates are low and inflation high, gold is the best way to store your wealth and insure against the erosion of purchasing power.