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India is jewel in gold crown

Gold is regaining its lustre with fund managers positive on the commodity as a hedge against rising inflation and stockmarket falls.

Net retail investment in the second quarter leapt by 51 per cent in tonnage terms to 132.9 tonnes and 60 per cent in dollar terms to $2.9bn compared to the same period last year, according to figures from the World Gold Council.

Demand from the jewellery and industrial sectors reached record highs, with India’s total demand for gold at 317 tonnes equivalent to half the global mine output for the quarter.

Tilney chief economist Peter Bickley says he is positive on the metal as a hedge against inflation and geopolitical risk.

He says: “Fundamentals point to long-term resilience and recent strengths is a reminder of geopolitical vulnerability.”

Smith & Williamson fund manager Charles Oliver says although mining stocks have been dragged down along with the rest of the market, the outlook for the sector remains strong. He says gold miner acquisitions reached record highs of $87bn in 2006 and he expects this trend to accelerate this year and into 2008 as more mature miners struggle to replace their reserve bases.

Oliver says: “Since new discoveries take many years to become mines, these companies feel the need to acquire more junior companies to maintain production levels.

He adds that falling production levels are supportive of rising gold prices. Mine production fell by 3 per cent year on year in 2006 and has now fallen by 6.6 per cent over the past five years.

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