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The Waning of Gold

At last, the message strikes a chord: gold is not a sureshot investment

According to a number of news reports, the festival of Akshay Tritya did not see any great enthusiasm for gold sales. Of course, depending on who a reporter had spoken to, every such report had its own version of why the gold trade's expectation of an annual sales boom hadn't come true. Some referred to the general economic downturn and reduced purchasing power, some to high gold prices and some could see a mysterious connection between the elections and poor gold sales. The Election Commission's model code of conduct can't possibly have anything against gold purchases, or at least, I don't think it does but you never know.

My guess is on what is depressing gold sales is that while high prices are important, the real driver is the expectation of where gold prices are going, and that is driven by the recent trend in prices. Commodity traders apart, for the last few years people who buy physical gold to keep at home were driven by prices that were high but also rising constantly. When you had to shell out Rs 25,000 for each 10 grams, you thought back to how recently it was Rs 20,000 and before that Rs 15,000. The sharply increased value of the gold someone had already bought created a psychological wealth effect which acted as a powerful lubricant on the decision to buy the next lot. This conveyor belt has now jammed, at least for the time being.

The most powerful determinant of the casual investor's behaviour is recent experience. As long as gold prices stagnate, that extra push for buying gold will be missing. And that's a good thing for savers.