Indian buyers usually import gold through official and other channels which are an effective drain on the forex reserves. As gold is the second commodity after oil that is imported.

The government's latest Gold Bond Scheme to tap household gold is appreciable. The scheme would put the unproductive gold kept in safes to productive use.

The bank recieving the gold will have many options of earning they can sell the gold in the spot market and use the money for higher yielding investments or could hedge the gold in the future market to save them from fluctuations in prices.

But in this kind of recession, investors would not be interested in taking a risk. The interest which would be around three per cent to four per cent on gold deposit compared to nine per cent interest if they sell their goldand put the money in bank. Thus the latter option would be better. This kind of scheme has worked in other countries and inflation was factored in the gold prices. In the present scenario, gold has touched a 22-year low at $257 per troy ounce, and is expected to touch $230 per troy ounce next year.

This analysis is based on certain constraints like supply, demand, production costs, considered as crisis commodity and the Indian rupee.Supply increased in the past few years due to the central banks gold sales. The latest in the run is the UK's intention to sell gold followed by Swiss National Bank and the IMF. This means that 2,500 tonnes of gold is expected to come into the market in the next three years.

On the demand side, India has the highest consumption of gold but the first three months of the calendar year show a decrease in Indian demand for the yellow metal.

The selling cost also can be determined considering the production costs which has come down from $285 to $201 per troy ounce. Currently,the South American mines have said they would produce gold at $45 to $125 per troy ounce.

Thus the chance of prices firming up is dull as it is not even considered a crisis commodity anymore. The crisis during the Gulf War pushed up gold by around 14 per cent but the Kosovo crisis and the Kargil crisis haven't affected the gold.

Thus the investors wouldn't be able to take a cover against inflation in gold. But if the rupee which has crossed the Rs 43-a-dollar mark, weakens more can benefit the investors. The table below explains the result if the investor deposits gold or sells the gold and deposits the money in the bank example 100 gmms @ Rs 400 per gram.

The author is a researcher with a leading commodity trading firm