Lata was always fond of gold, whether in the form of jewellery or in coins and bars. A majority of her surpluses would find their way into gold and on being questioned about it, the answer always was "Why shouldn't I? Hasn't gold given the best return in the past few years?" Well, Lata's in for a rude shock and so are many others like her. From its peak of almost Rs 34,000 per 10 grams in November 2012, gold is down to about Rs 26,000 per 10 gram. So in less than 5 months, gold has corrected almost about 20%. So what is wrong with this shiny metal which was always perceived as a safe investment and has consistently risen for almost a decade?
Let us first look at some reasons which led to the rise in the gold price in the last few years. Year 2008 saw the sub-prime crisis in the US leading to stock market crash worldwide. The world economy was in doldrums and US dollar was weakening. It was perfect setting for rise in gold price. With US dollar declining, central banks across the world started increasing their gold reserves.
Also, investors starting flocking to gold, given its inherent effectiveness as hedge against inflation and the facet of not losing its purchasing power over time. That the equity and bond markets were doing nothing helped gold in its ascent. It may be important to note here that local factors may have very little to do with the rise and fall of gold. It is generally determined by trends in the international market.
In US dollar terms, gold has not generated any meaningful returns over almost past 2 years. But the situation in India has been quite different. The fall in the gold prices in the international market has been cushioned by the depreciating rupee. With a drop of almost 20% against the dollar in the past 2 years, the depreciating rupee has kept the gold prices stable in India.