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THE gold boom, which is in its third year now, continues to attract household and institutional investors. Gold jewellery has lost much of domestic demand. Howerver, its export fetches huge amount of foreign exchange.
“Domestic demand for jewellery is down 60 per cent or so,” says Haji Haroon, a Karachi-based representative of All Pakistan Jewellers Association. “However, investment in gold goes on. In less than three years, hundreds of new shops have sprung up across the city where people sell old jewellery that is recycled for making trendy gold ornaments for exports.”
Owners of these shops along with their old peers have formed trade associations all over Karachi from Clifton, Saddar, Ranchore Lines, Tariq Road, and Hyderi to Paposh Nagar, Liaquatabad, Orangi, Shah Faisal Colony, Malir, Korangi, New Karachi and Keamari.
They supply recycled gold to jewellery exporters who can import zero-rated gold only against their export volumes or after paying one per cent withholding tax on import bills. Purchasing gold locally to use it in their jewellery exports benefits them.
“In some neighbourhoods, people also sell jewellery to use only a part of its proceeds to make new jewellery of lighter weight.
They utilise the remaining amount to make both ends meet or to reinvest elsewhere,” says a leading goldsmith in Hyderi.
A central banker recalled that the State Bank of Pakistan’s decision last June to allow gold as a collateral for seeking microfinance loans was taken keeping in view frequent selling of old jewellery for cash by people in low-income groups and falling volumes of micro finance.
Bullion dealers say, though purchase of gold jewellery is nominal, many people buy gold bars of 10, 20, 50 and 100 grams or of one, two, five and ten tolas in short-to-medium term investment. When the price of the yellow metal rises to the levels they are looking for, these investors sell them to earn quick profits. A real estate agent in Clifton said realtors in the town are also among gold investors.
“I know a few of them who earned lots of money through it and built shopping plazas and apartments in New Karachi, Malir, Nazimabad, and North Nazimabad.”
Bullion dealers say, many gold merchants who buy old jewellery, use only a part of the proceeds generated through its onward sales to exporters. They too use part of them for investing in gold futures.” Officials of Pakistan Mercantile Exchange (formerly National Commodity Exchange Ltd.) confirm it. But they insist that investment and trading in gold futures through PMEX is not a monopoly of this class. “From banks, provident and pension fund holders to stock and commodity brokers to high net worth men and women from all walks of life are investing in gold. And some of them are trading in gold futures,” one of the officials told Dawn.
He said trading in gold was a key driver of PMEX trading volumes that surged more than six fold to Rs490 billion in the last fiscal year, from Rs63 billion a year earlier. Though PMEX has diversified its product base, gold still accounts for more than one half of total value of the traded volumes.”
PMEX offers electronic investment facility to all in future contracts of one tola of gold to 100 tolas and from one ounce to 100 ounces. One kg lots of gold futures are also available for investment trading. There are, however, limits on physical delivery.
For example, whereas the unit of trading in one tola futures is exactly one tola or 11.664 grams. Those who want to get physical delivery get it in the form of a 10 tola bar—not less than that.
The lust for gold lies in its rates of return that are far higher than interest earned on bank deposits, national saving schemes, stocks, units of mutual funds, treasury bills, Pakistan Investment Bonds or even high-yield corporate bonds— all of which offer less than 15 per cent annualised return and that too on full three year investment.
“What you can earn even on the best mode of investment in a year, you earn it within a quarter if you go for gold,” said a member Karachi Stock Exchange—referring to about 20 per cent increase in gold value so far during this quarter.
He said depressed real estate market and low economic growth had also boosted investment in the precious metal. He said investment in gold also provides a real protection against high inflation.
Gold re-emerged as a real store of intrinsic value after the financial crisis and global recession of 2008-09 and has been in high demand since then. Big buying from the central banks of Russia, China, Brazil, India and some other countries, rush of institutional and high net worth individual investors and increase in gold demand from neo-rich Chinese and Indian as well as Middle Eastern millionaires, all continue to make the yellow metal costlier.
Worries about falling growth in the US and the Europe and high inflation in Asian economies are also contributing to the rise in demand for gold as a trusted hedging tool. The price of gold has more than doubled in less than three years rising from $870 an ounce at the end of 2008 to $1820 now.
In Pakistan, the rise of gold in 2009 and 2010 and the resultant increase in the supply of recycled gold from those who sold old jewellery for profit taking was a key factor behind increase in export earnings.
In last two fiscal years, jewellery exports fetched over a billion dollars. Exporters hope to earn another billion dollars during this year. In first two months (July-August 2011), $150 million have already come in.
