Gold standard

The over 3 per cent drop in domestic gold prices in just one week brings relief just ahead of the presentation of the Union budget. On Wednesday, gold dropped by 2.6 per cent, its sharpest drop in a day in one year. But for the dip to sustain, investors in India and abroad need to be convinced that the weakness in the global recovery has been contained. Gold and silver prices flare up when investors lose confidence in other asset classes and seek the ultimate safe haven. What will also help them make up their minds are the US unemployment numbers, due late on Thursday night, and a testimony by the Fed Reserve chief, Ben Bernanke, next week. Falling unemployment, along with Bernanke's testimony, will inform investors if the world economy has returned to the path to growth. That will be a definitive sign for precious metals to come off their highs. A committee of the US Federal Reserve has already expressed its reservations on its continuing to pump in additional dollars to kickstart growth. As a result, the dollar too has firmed up, contributing to a lower demand for gold.

This could also signal a sustained downturn in gold and silver prices within India, which are also showing tentative signs of cooling off. Silver prices, for instance, have eased by about 7 per cent in the past seven days. With the marriage season coming to a close, and the end of year cash tightness in the market, the domestic demand for jewellery is unlikely to flare up as it did in January this year, when gold imports shot up by 23 per cent.

The dip in gold prices will make the government's job of keeping the current account deficit closer to 4 per cent easier. Throughout this fiscal, the collapse of exports and stiff gold imports had combined to create a nightmarish scenario for policymakers. The weakness in the current account had made the rupee lose value in the exchange market. That phase is hopefully over. But the government may have to abandon plans to further raise duties on gold and silver as this would, instead, deepen the incentive to smuggle the metals. Taken together with the easing of prices of crude, the year might end far better than had seemed possible at one stage.

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