It’s the classic error in investment: investors get attracted to an asset class after it has turned red hot and its prices are at or near their long-term peak. With gold trading at around Rs 15,600-15,700 per 10 grams last week, the buzz around the yellow metal reached fever pitch. For conservative, long-term investors, this might precisely be the time to turn cautious.

Constrained supply

The supply of gold comes either from what gets mined each year or from the sale of existing above-the-ground stocks.

As for mining supply, no major mine has been discovered in the last several years. Supplies from existing mines have been stagnant and are likely to diminish in future. In South Africa, the world’s major producer, the depth of the pit from where gold is extracted is now five kilometres, which pushes up cost and makes the enterprise economically unviable.

Supply also comes from privately-held stocks belonging either to central banks or to individuals. Central banks have been holding on to their gold reserves because of the uncertainty surrounding the value of the dollar and the Euro. China, in fact, has been augmenting its reserves: it has purchased around 600 tonnes over the last six-seven years.

Supplies from individuals, called recycled gold or scrap gold, tend to come into the market whenever gold prices rein high, as is the case now. However, as Ajay Mitra, managing director, World Gold Council, India subcontinent, informs: “Over the last 10-15 days scrap has not been coming into the market either because individuals have already sold what they owned or because they are holding it back in anticipation of higher prices in future.”

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