IT is a mix of both exporters-led and investors-driven demand that dictates the dynamics of gold trade. Jewellery exporters consume every gram of imported gold and much of the yellow metal offloaded in local markets.

Households sell old jewellery for cash to meet their expenses and investors sell gold coins and bars they’ve bought for profit-taking.

Spot gold price surged, about 13 per cent, during July-September 2012, from $1570 an ounce by the end of June to more than $1770 an ounce by the end of September. In local market prices, 10-gram price rose from less than Rs50,000 to more than Rs55,000.

“Exporters of jewellery import gold at international prices. And they also buy gold bars from local investors also at international rate minus Rs600 per 10 gram, Other than that they just convert international gold prices from the dollars into rupees. All domestic variables of gold trade have nothing to do with local prices, the exchange rates matter,” says an official of Sindh Gold Merchants and Exporters Association.

But why there is this deduction of Rs600 per 10 gram, if international prices serve as the benchmark? Actually, this is one good way of profiteering. Lots of jewelers do this on the excuse that using 10-gram or 20-gram bars in jewellery- making process involves a cost whereas normally gold imports are in the form of much heavier bricks and tablets weighing up to a pound or even more.

“But the 10-gram or 20-gram bar they buy from you, at slightly lower than international prices, is sold to an investor exactly at the prevailing international prices whenever he drops in their shops.”

This is true not only in case of physical trade of gold but also in trading of gold futures on Pakistan Mercantile Exchange Ltd. “Price setting is, by and large, in line with the international trends and forecasts,” explained an official of PMEX. “We don’t build up into the prices quoted on PMEX such features as increased demand from domestic investors.”

PMEX investors dealing in gold bars are given the option to get physical delivery or settle the change in prices in their accounts. “If the prices of, say, 10 or 100 gram gold bars they had purchased earlier show an increase they can either offload the bars and get the entire sale proceeds leaving in our account just the trading fee. Or else, they may keep the sale proceeds in their accounts with us to use it for future transactions. The same is true where investors book a loss. They can either get the whole amount back or just let their accounts with us decline to the extent of the loss that they incur.”

Sovereign debt crisis in the EU and slow economic recovery in the US have brought down the returns on government security papers to negligible lows, in some cases to sub-zero levels. Capital gains on equities in advanced countries are just nominal and dividends are not attractive. In many developing countries yields on bonds are falling, according to a recent report of the Asian Development Bank.

Food prices in emerging economies are high, consuming a big chunk of additional disposable income of their people and encouraging them to look for investment modes of higher yields. Global gold mining is proceeding at snail’s pace because of the lack of huge investment required in it.

Above all, reemergence of gold as a store of intrinsic value particularly after the global financial crises of 2007 and subsequent recession of 2008-09 continue to drive enormous amount of gold buying by central banks.

According to World Gold Council, central banks of the Philippines, Russia, Ukraine and Kazakhstan made huge buying within three months to June 2012. During April-June 2012 overall official gold buying by central banks and government agencies almost doubled to 157 tonnes, from the January-March period, and accounted for 16 per cent of overall global demand. Leading gold merchants in Karachi say that the rush for gold seen immediately after the global financial crisis and recession of 2008-09 is weakening now after recovery of stock market, handsome return on some mutual funds units and accelerated trading of food commodities’ futures on PMEX.

“Now, the centre of activity for physical gold investors is shifting gradually from Karachi to Lahore and Multan,” one leading jeweler told Dawn, citing poor law and order in the metropolis as one big reason. In addition to it, “euphoria for gold investment in Lahore and Multan is higher because awareness about complex financial products there is lesser than in Karachi. Investors keep switching over, from real estate to gold to stocks and (now) to wheat, rice and sugar futures and vice-versa.”

Bullion merchants say investment in and trading of gold accounted for a negligible part of domestic commerce and external sector activities. But with jewellery exports nearing $1 billion, or four per cent of total exports, domestic economic activity generated by investment in and trading of gold is growing. Globally, the trading of gold was estimated above $51 billion in April to June quarter 2012.—Mohiuddin Aazim