Gold always glitters?not just for Indian families who ascribe the metal almost spiritual qualities and still, on average, prefer the metal over financial hedges but also for hardheaded investors and speculators globally. And gold becomes more keenly watched when financial markets are in post-turmoil correction, as now. So even though the earlier surge in gold prices?it crossed the $1,000 mark per ounce mark in mid-March?now seems to have stabilised, no market player is willing to take a bet on the trend. One reason is that even current prices are higher than those expected by the most bullish analysts. The dollar?s depreciation, of course, fuelled gold?s rise. Note that in euro terms, gold?s price is about a third of that in dollar terms. However, gold prices have sharply risen in euro terms as well, current levels are more than three times that of last year?s. Gold prices are basically reflecting uncertainties in currency and commodity markets. The Indian currency, despite some wishful thinking in some policy-making quarters, is not immune to global trends?rupee prices of gold have jumped as well.
How to interpret gold price movements for broader macroeconomic trends? For a number of reasons, including those bequeathed by history, gold has been honoured with the role of an asset that can be tracked to form early indications of price behaviour and monetary responses. Global data suggests rising gold prices have usually preceded inflationary bouts and so there?s an auric pointer to monetary hardening. The statistical significance of gold prices as a predictor has increased in India ever since gold control was abolished. Price differences between Indian and global markets in gold have come down from 50% in the early 1990s to just around 5% now. So, what is the message from gold prices, which rose sharply in the first five months of the year and have sort of steadied now? Assuming that the current price softening is here to stay a while, what is being communicated by gold prices is that fears of rampant inflation globally, and in India, have been assuaged somewhat. Also, that inflationary forces may be in the process of getting tempered. And, perhaps, monetary policy, which must plan ahead ideally, should take cognisance of this.
