It's a lump of metal with no cash flows and earnings power. The buyer even foregoes gradual accumulation of intrinsic value as it is industrially useless. But just imagine the second-largest economy in the world frantically buying this metal.
Such is the intensity of demand that its total purchase in the first quarter of this year was six times that of last year. The metal we are talking about is "gold" and the country in question is China.
The love for gold in the world's largest consumer, India, is also known to all. In India, government spending on unproductive assets instead of capital assets has contributed immensely to inflation. Higher inflation is one of the primary drivers for gold demand in India, and the same is expected to continue.
Especially with the current high cost of living the bias to be in physical savings (real estate or gold) over financial savings like deposits, etc., seems pretty obvious.
Till the time we return to a balanced growth path with moderate inflation, which allows for more savings at household levels and positive real interest rates, gold would continue to be the asset of choice.
Countries which have mismanaged their finances have seen gold returns moving much higher in their domestic currency. The same can be seen in India as gold prices in rupee terms increased between September-April by 9%, whereas the metal dropped by 9% in dollar terms.
With the rupee expected to remain under pressure due to inflation and current account deficit, the gains made in gold in rupee terms are here to stay. The rupee might receive some respite if global crude prices decrease. But given the global economic trends, it may be more difficult than it seems.
Gold price in dollar terms is down almost 20% ($1,900 to $1,600 per ounce). The recent sideways to down movement has led investors to question the safe haven properties of gold and whether gold prices have already peaked.
But it is important to understand that bull markets do experience such periods of consolidation and correction which can run as high as 30% from top to bottom.
