The allocation to gold for institutional investors is based on the institution's overall portfolio and the asset manager's investment mandate. If the cost of producing gold is reduced due to technological advances, the supply of gold will increase. As gold prices rise with inflation, an increase in interest rates at the same pace as inflation will not reduce gold prices. A gold investor in India has two sources of profitability, the price return on gold appreciation and the currency's return on the depreciation of Indian rupees.
Gold offers a proven solution for families in these regions to retain their purchasing power and participate in investment growth. Too many good things are happening for gold and in the next decade they could give a boost to the yellow metal; reckless government spending around the world, central banks buy gold, gold grades on the ground fall, exploration spending falls, and the list goes on. For example, India consumes 800 to 850 tons of gold annually and rural India accounts for 60 percent of the country's gold consumption. Demand for gold continues to change, and in recent times it has increased as electronics manufacturers have seen the use of gold in their products for conductivity.
Of course, gold is also consumed as jewelry, and there are huge demand drives even from global governments looking for gold as a store of value they hold in central banks. If the cost of mining is reduced, it will be feasible to operate more gold mining projects, leading to an increased supply of gold. Investing in gold becomes less attractive when purchasing power can be maintained just by holding the currency. The yield of gold in Indian rupees is significantly higher than the yield of gold price appreciation.
However, demand for gold is difficult to predict, as the drivers of demand for jewelry and investments are difficult to estimate in advance. As a gold investor does not receive any cash flow during the holding period, it is impossible to value gold using conventional valuation methods. The policy of quantitative easing is in full swing in some of the world's largest economies and this represents good news for gold, since savings are not taken into account when it comes to dollars and a new means of saving, such as gold, is needed.
