Gold craze may cool down in India

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MUMBAI/NEW DELHI (Commodity Online): Last week saw gold prices sliding continuously for 8 days in Delhi bullion market, a record of sorts during the past 4 years.

This has made people think that the gold prices are cooling down. Gold prices internationally are at $1,100/oz - just a shade below the all time high seen in January 2010. As an asset, gold has given strong returns over the past five years - especially as other assets faltered during the recession. However, with the world economy seemingly on the mend, it may be time for investors to dump gold.

Noted commodity investor Jim Rogers has reportedly bet that gold price will reach $2,000/oz in the next decade - that's almost 80 per cent higher than the current price. Gold has become a favourite with investors over the past few years. In 2003, the total investment demand of gold was pegged at 340 tonnes. This had increased to 686 tonnes in 2007 - but nearly doubled in 2008 with the onset of the financial crisis. The rush for gold is likely to calm as economies around the world head on the road to recovery. Recent data from the US - GDP growth, retail sales etc. are now turning out positive.

Meanwhile, the higher price of gold has pushed down the jewellery demand, which forms the single largest category of gold consumers. In fact, prices had moved up so sharply that Indians, known for their love of gold for over two millennia, started keeping away from the yellow metal.

India's jewellery demand in 2009 was 405 tonnes - down 19 per cent from the year before and the lowest since 1995. In fact, several jewellers in India have started selling gold on equal monthly instalments.

Towards the end of last week, precious metals generally reversed their recent losses. The Chinese CPI inflation number was said to weigh on risk appetite. In London, on Friday, the PM Fix was at $1,106.25 an ounce, edging up from the previous day's $1,104/oz. On the other hand, silver spurted to $17.31/oz (Friday AM Fix) from the previous day's $16.91/oz.

Longer-term investor demand for gold remains steady. However, if monetary tightening continues to gather pace in major economies, it could adversely affect prices. After all physical demand is yet to accelerate with large importers such as India facing demand compression due to high and volatile prices. After expanding in 2009, gold mine supply in 2010 is expected to increase modestly.

In the coming weeks, barring exceptional developments, the US dollar may trade between 1.33 and 1.38 to a euro. In the event, gold will trade range-bound. The yellow metal is sure to face resistance at higher levels (closer to $1150/oz) and profit taking will ensue. While the upside is limited, there is a slight downside risk to prices.

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