Gold’s Price Surge Skews Inflation Numbers Across Asia

Gold Surge Vexes Asian Officials
Gold jewelry is displayed at a store in Seoul, South Korea. Photographer: SeongJoon Cho/Bloomberg

The surging price of gold is fueling inflation from India to Indonesia and forcing statisticians to decide whether jewelry made of the metal still belongs in consumer-price indexes.

In South Korea, gold rings will be dropped from the inflation basket for the first time since 1975 as part of a scheduled reweighting in December, Bang Tae Kyoung, deputy director of the statistics agency, said in an phone interview from Daejeon. “People are now buying gold mostly for investment purposes, and so it should be classified as an asset, rather than spending,” Bang said.

Gold has climbed 24 percent this year as turbulence in equities and currencies, money printing by central banks, and a decade-long bull market in the metal lure investors to an alternative store of value. Bullion vaults such as the Swiss Precious Metals facility in Singapore are nearing capacity, and Tiberius Asset Management AG warns that gold is in the final, overheated phase of an upswing.

“It’s more of an asset -- it’s not a consumption item,” said Prasanna Ananthasubramaniam, Mumbai-based chief economist at ICICI Securities Primary Dealership Ltd., a unit of India’s biggest private lender. As a “speculative asset class,” gold should be dropped from India’s basket in the next reweighting, he said.

Korean Traditions

Gold for immediate delivery fell 0.6 percent to $1,771.73 an ounce as of 9:03 a.m. in London today, while the dollar rallied after the Federal Reserve indicated that it saw “significant downside risks” in the U.S. economy. The metal reached a record $1,921.15 on Sept. 6.

In South Korea, where President Lee Myung Bak has declared “war” on inflation, a 29 percent jump in the cost of gold rings pushed inflation past 5 percent for the first time in three years in August. A tradition of giving what is called a “Dol” ring as a gift for a child’s first birthday is a factor.

In Indonesia, gold jewelry was the biggest contributor to a 0.93 percent increase in consumer prices in August from the previous month, accounting for 0.19 percentage point of the gain, government data show.

The issue doesn’t arise in developed nations including Japan, the U.S. and the U.K., or in Asian economies such as Singapore, Vietnam and Hong Kong where the metal is absent from inflation baskets or jewelry has a limited effect.

India’s Inflation

Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said gold’s influence on China’s inflation rate via the personal ornaments category is “tiny.”

While gold and gold ornaments have a weighting of just 0.36 percent in India’s main index, a 52 percent jump in prices for that category was enough to push up the headline inflation rate in August. With gold, the wholesale price index climbed 9.78 percent in August from a year earlier. Without, the increase would have been 9.49 percent, according to ICICI.

ICICI’s Prasanna said that, pending any reweighting, the Indian central bank needs to “look through” gold’s effect when assessing inflation and monetary policy.

In South Korea, the price of a 3.75-gram ring for a first-birthday gift has soared to a record of 298,000 won ($258), according to data on the website of the Korea Jeweller’s Association, Inc.

Warning From Soros

In Seoul yesterday, housewife Kim Geum Ja, 66, said that while she doesn’t know much about consumer-price indexes, “what I can say is that the current Dol ring price is very expensive and people are trying not to buy.” At the same time, “some people have to buy anyway, so that’s quite burdensome,” she added.

Kim said she hasn’t yet decided whether to purchase a ring for her youngest grandchild’s first birthday in November. In expressing her concern at the price gains, Kim joins billionaire investor George Soros, who called the metal “the ultimate asset bubble” in 2010.

“We are now in the final, overheated phase of gold’s protracted bull market,” Chris Eibl, a partner at Zug, Switzerland-based Tiberius, which has $2.8 billion in assets, wrote in a report distributed Sept. 15. Gold “is already so overbought in the wake of panic selling of bank stocks that a calming of the European financial markets could well trigger a tactical pullback by about $200 to $300.”

In Jakarta, Fauzi Ichsan, an economist at Standard Chartered Plc said that removing gold from Indonesia’s basket of consumer goods, was “theoretically logical.” At the same time, it could lead to speculation that the statisticians were under political pressure, he said. Yunita Rusanti, the head of the consumer-price statistic sub-directorate, declined to comment on whether gold jewelry should be removed from calculations.

Gold bought for investment accounted for 38 percent of total demand in 2010, compared with about 4 percent a decade before, the World Gold Council estimates.



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