Gold?s roller-coaster ride may continue for some time, but the recent rush for the precious metal hasn?t created a bubble waiting to be burst as projected by some global analysts, because demand from India and China still remains robust, according to a top executive with the World Gold Council.
Gold started advancing at a faster pace since the first week of August as investors sought refuge in its haven status after Standard and Poor?s cut the top-notch credit rating for the US and the debt crisis aggravated in Europe, and has since maintained a volatile movement on uncertainties about the fate of the global economy.
Gold prices shed the maximum on Monday since the financial turmoil in 2008 on mounting worries about Europe?s ability to stave off a debt crisis, and started a fourth straight week of decline.
Global gold futures declined to $1,534.49 in early trade on Monday?its weakest since early July?after hitting a record $1,920.30 on September 6. Spot gold suffered its sharpest single-day loss since October 2008 by dropping 5.8% to $1,561.69 an ounce.
Global research firm Wells Fargo warned late last month that speculative demand has pushed the gold market into a ?bubble that is poised to burst? as prices scaled fresh peak.
However, Ajay Mitra, managing director (India and Middle East) of the World Gold Council, told FE that although gold prices are witnessing a correction, the robust physical demand from India, the world?s largest consumer, and China will prevent any sustained slump in the precious metal?s movement for a long period.
India and China account for around 55% of the global demand, of which the share of gold jewellery, bars and coin stands at around 78%. ?So these products can determine how the entire category (gold prices) should behave. The speculative demand (the reason behind the recent price fall) is driven by non-physical form of business, and its share in the overall demand structure isn?t significantly high. So in my opinion, such speculative demands don?t make the gold trade a bubble that is about to burst,? Mitra said.
He said around one million marriages are held in India each year, and on top of that Central banks across the globe are raising gold reserves to diversify their portfolios. ?All these things are going to boost the physical demand for the commodity, although the demand pattern during the Q3 ending September holds the key to any fair assessment of the movement of gold,? Mitra said.
Moreover, demand from India and China?the world?s leading consumers?is expected to rise in the coming days because of increasing economic prosperity, high inflation and forthcoming key gold-purchasing festivals, likely supporting prices.
Global gold demand rose 5% in value in the quarter through June from a year before, although consumption suffered a 17% dip in volume to 919.8 tonne during the period due to high prices of the precious metal, according to a report by the World Gold Council.
Nevertheless, demand from India and China rose by 38% and 25%, respectively, in value.
Demand during the second quarter also got key support from some central banks, which raised gold reserves to diversify their portfolios, although a fall in overall investment in gold offset gains in some other segments in the June quarter, the council said. Purchases by central banks quadrupled to 69.4 tonne during the June quarter.