The last 20 years have been spectacular for gold. From the world economic crisis to increasing investment demand and tight supplies, there were many reasons for the yellow metal’s glitter. If you had invested in gold in 1993, you would be sitting on a fortune now with the metal’s price having risen 400 per cent. From $300 per troy ounce in January 1993 to $1400-1500 now.
With the rupee depreciating, Indian investors would have made even higher returns. The rupee, which traded at 33-35 against the US dollar in the 1990s, has plunged to 50-52/$ over the last decade.
Ups and Downs
In the 1990s, gold was in a bear phase. Between 1993 and 1999, it dropped 23 per cent to a low of $255/ounce. This was when supply was rising with new mines opening in Brazil, Australia and the US. Equity markets across the globe were also doing extremely well.
However, from the lows of 1999, gold climbed higher and higher till 2012. The dotcom bubble burst in 2000 that saw the Nasdaq sink from record highs was the first big trigger for gold prices. The plunge in Internet stocks, which were till then the market favourite, saw investors rushing to buy gold. By end 2000, the yellow metal had hit $276/ounce.
Higher demand for jewellery from countries such as India, the UAE and Japan meant gold ruled strong between 2001 and 2002. Also, as the dollar was weakening, gold was the obvious choice for investors. Demand for gold bars, coins was 11 per cent higher in 2002 in dollar terms. The dollar index, which measures the value of the greenback against six major currencies, fell to 101.8 by end-2002 from 119 in end-2000.
GOLD ETFs
In 2004, gold exchange traded funds (ETFs) were launched in the US and South Africa and this was a landmark year in the metal’s history. With the introduction of these easily tradable paper securities, more investors started to ‘own’ gold and prices picked up. Gold closed the year at $435/ounce.
Between 2004 and 2007, the burgeoning demand from ETFs pushed prices up as supply couldn’t grow at the same pace. The SPDR Gold Trust, the largest ETF held 628 tonnes of gold by end-2007. Gold breached the $800 mark in 2007.
Stepping into 2008, gold prices were helped by the collapse of Lehman, the US credit crisis, and loss of faith in the financial system. The central banks across globe began to diversify from the dollar by adding gold. Gold hit a high of $1,032/ounce in March 2008 as the dollar index tumbled to a low of 71.
Recession in US
In 2008, as the US economy slipped into recession, all commodities corrected and gold too fell initially. Sceptical investors preferred to hold cash and liquidated gold investments. The yellow metal saw prices drop to $682/ounce by October 2008, down 34 per cent from its highs in the early part of the year.
At this point, however, no one knew that gold was set to set off on another big rally. The falling trend in gold price reversed as investors, along with central banks, resumed purchases.
From the lows of 2008, gold prices rallied 80 per cent to $1,226/ounce in December 2009. With the central banks turning net purchasers of gold after two decades and dollar continuing to lose value, gold rose to a new high of $1,921/ounce by September 2011. Gold hovered around $1,600-1,800/ounce till end-2012. But as 2013 began, prices started to correct.
Gold has lost nearly 16 per cent of its value so far this year. The improved outlook for the US, with the developed world equity markets making a comeback, and the fear of central banks in Europe selling gold in the open market and other debt-ridden Euro Zone countries following suit, have been negative for gold. The yellow metal is trading at around $1,350/ounce now.
Indian appetite
Indians’ appetite for gold has been a key driver of demand, globally in the last two decades. Indians have bought up about a fifth of global gold supplies every year in this period. But it was only in 2007 that the first ETF was launched in India. Until then retail investors with a small investible surplus could not invest in gold.
However, investment demand for the yellow metal has been strong in the country with affluent investors buying it and the testimony to this is the fact that India consumes 300-350 tonnes of gold in the form of bars/coins today, up from the average annual consumption of 100 tonnes in the 1990s.
Exchange traded funds also quickly caught the fancy of Indian investors. Five years since the launch of the first gold-ETF, there are today 14 such funds holding 40 tonnes of gold.
Over the last two decades, Indian consumers’ jewellery consumption pattern however hasn’t changed much despite the depreciating rupee making gold costlier. In 1993, retail gold of 22 carat quoted at Rs 414/gm, today it is Rs 2,503/ gm. The country consumes over 700 tonnes of gold a year in the form of jewellery.