Value Line Advisors Pvt Ltd.(VLA) is an investment banking & merchant banking company registered with SEBI, running under the directorship of Mr. Sanjiv Chainani & Ms. Bela Desai

1. Column B u s i n e ss I n d i a u t h e m ag a z i n e o f t h e c o r p o r at e wo r l d
Shining streak
When real interest rates are low, the yellow metal glitters
“When paper money systems begin to crack at the a hedge against inflation. India is the world’s
seams, the run to gold could be explosive” largest gold consumer market. It is a well known
– Harry Browne fact that in India, gold is seen as a symbol of
security and a sign of prosperity.
W
hat is real interest rate (rir)? “Real Currently, India has one of the highest sav-
interest rate is the lending interest ing rates in the world, estimated at around 30
rate adjusted for inflation as mea- per cent of total income, of which around 10
sured by the gdp deflator” – World Bank. From per cent is invested in gold. More than 50 per
this definition, it is very clear that rir is a factor Sanjiv Chainani cent of household savings are invested in fixed
of interest rates prevailing in the economy and deposits. With a low rir prevailing in the econ-
the rate of inflation. omy, and with limited low-risk investment
It is a known fact that India is struggling options available with the potential to earn
with the problem of persistently high infla- inflation adjusted high returns, the incremental
tion despite the tight monetary policy stance household savings are being invested in gold.
adopted by the Reserve Bank of India (rbi). This The ease of buying gold for the investors in
has resulted in a lower-to-negative rir in India the electronic form (e-gold and gold etfs) and
in past few years. various attractive schemes offered by domestic
On the other hand, western economies gold jewellers are adding fuel to demand.
are facing the problem of a liberal monetary In recent times, the price of the yellow metal
policy with all-time low interest rates and has been north bound. It has reached an all
constant infusion of money by way of quanti- time high of `32,500. The recent rally in gold is
tative easing to boost their economies. This has fuelled by the announcement of the unlimited
resulted in the lower or negative rir in western bond buying programme by the European gov-
economies. ernment and the expectations of further quan-
rir has a direct influence on household sav- The author is titative easing by the central bank of the US.
ings. The lower or negative rir makes invest- managing director With persistently high retail inflation rates
ments in asset classes like fixed income of Value Line in India showing no signs of easing and with
instruments unattractive. This results in a Advisors Pvt Ltd, further quantitative easing by the central banks
steady increase in demand for gold, leading a Category 1 of the US and Europe, it seems rir is expected
to a sharp surge in gold prices as seen in last Merchant Banker to remain lower resulting in a further surge in
five years. Historically gold is acknowledged as registered with sebi the price of the metal in times to come. u
Gold prices - India Gold prices - US
30000 Gold price (`/10 gms) Real interest rate (%) 12 2000 Gold price ($/ounce) Real interest rate (%) 10
10.8 26,400 10
1,571 8
0
22500 1500
8
6
6
15000
0 1000 4
4
2 0.7 2
2
7500
0 500
0
0 0
685 41 0.5
0 -2 0 -2
1978-80
978-80
978-80
80
0 81-90
81 9
8 90 91-2000 2001-11 1971-80
1971-80
1971-80
9 -88 81-90 91-2000 2001-11
Real interest rates data source: World Bank. Gold prices data source: jagoinvestor.com Real interest rates data source: World Bank. Gold prices data source: www.nma.org
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S e p t e m b e r 3 0 , 2 01 2