Gold demand in India’s retail sector has plunged to a 26-year low while the price rose to an all-time high of `55,000 per 10 grams. Within this seeming contradiction is the curious plan of many factors, some global, and local.
And yet, gold will continue to play a significant role in Indian as it did in the days of Samudragupta, 375 CE, son of the Gupta emperor Chandragupta, who issued gold currency and performed the Ashvameda (horse) sacrifice to establish in war victories.
Gold is present in India life at various levels: as an emotional and safety anchor, as an hedge against inflation and also figures in the political sphere.
External Affairs Minister S. Jaishankar last year referred to the wholesome transfer of wealth by the British, some of which was in gold. “India had two centuries of humiliation by the West in its predatory form it came to India in the mid-18th century,” he said.
“An economic study tried to estimate how much British took out of India, it ended up at a number of $45 trillion in today’s value,” Jaishankar said at the noted think tank Atlantic Council in Washington DC.
But it is to the Bank of England that the then government of PV Narsimha Rao turned to when it decided to pledge the nation’s family gold for a loan to tide over an economic crisis in 1991. India mortgaged 67 tonnes of Gold to raise $600 million to prevent itself from defaulting on import payments. However, the Reserve Bank of India was quick to buy back the pledged gold in December that year.
The RBI learnt its lesson and has been steadily buying gold year after year with the present level of stock rising nearly 10 times to 653 tonnes. It bought 40.45 tonnes of gold in financial year 2019-20.
There is a lesson for the retail investor here. If the central bank of India and several other countries trust gold as an important investment option, why shouldn’t you?
Gold Drama
The crucial point about buying gold is the price point. It is now evident that the ordinary investor has missed the brief buying opportunity that emerged as gold prices began climbing up the price curve in early August before hitting the all-time high of `55,000 per 10 grams. The sudden jump is best understood in the context of steady growth in prices at `29,667 in 2017, `31,438 in 2018 and `35,220 last year.
The price increase was a awesome 40 per cent offering huge opportunities for short-term profits until the prices began falling in the third week of August and the yellow metal losing more than `4,000 in value to reach `51,200 by August 25. And yet, the gold is rallying at a much higher level than it did a year back.
In some ways, the government is responsible for push up in prices because it raised the rate of its sovereign gold bonds from `48,000 in June for 10 grams to `53,300 in early August. The government needs to cover itself because it will ultimately repay bond holders at the prevailing price of gold during maturity dates five and eight years from now. But many in the market saw the government move as a new benchmark which influenced gold pricing.
Investors are eagerly waiting for the offer price when the government announces its next batch of gold bonds to be sold between August end and early September.
It is not in the area of pricing but even regulators have suddenly become active taking a decision they had delayed for long.
The Multi Commodity Exchange (MCX) launched the country’s first bullion index, Bulldex, on August 24. The move will give a big push to gold futures opening up new opportunity for speculative trading for both large and small investors.Gold and silver are already being traded as individual commodities on the commodity exchange and bulldex offers an additional option to the trading community.
“Bullion Index futures offers retail investors an opportunity of investing in the bullion sector as a whole without the need to analyse the gold or the silver market separately. It is convenient as the contracts are settled in cash,” said Saurabh Chandra, Chairman, MCX.
Even as excitement soar in the gold market, the retail investor moved in the opposite direction. COVID-19 led to erosion of income and an strong tendency to avoid new investments. The World Gold Council has estimated that the Indian jewellery demand fell 74 percent during the three months ending June 30.
Though estimates have not been made about the movement in the resale market, there is indication that vast number of families have either sold or pledged their gold to raise funds to meet the financial and health crisis that hit millions of people. Many others could not redeem their past pledges on deadline and allowed loan giving companies to take ownership of their gold. This is a bonanza for the loan givers—and a direct hit against the loan takers—because the gold had been pledged at much lower prices than today.
The market was being driven by institutional buying and a host of other factors with the retail player keeping away. Institutions include companies with surplus cash, hedge and exchange traded funds for gold besides the central banks.
This is also a strong sign that many companies with surplus funds are investing as part of their treasury management program and staying away from business investments. The weakened economy, partly caused by the pandemic but mostly a continuation of the slowdown that began in 2018, has dried out business opportunities forcing companies to look for other ways of investing. Physical gold and paper gold are among the options. Was it wise on the part of retail investors with investible funds to stay away from the gold market as prices began rising?
“We believe every investor should have around 10 percent of the financial assets in Gold and we have been recommending our clients to buy gold since last year,” said Ashish Ranawade, Head of Products-Wealth Management, Emkay Global Financial Services. The big question is whether gold prices will continue to rise in the coming months or settle at a saturation point of around `50,000 per 10 grams. Most analysts believe that gold will continue to be much higher than last year’s level and rule above `45,000 even in the worst case scenario.
But optimists think the possibilities of gold price increase is ample because most of the reasons that pushed up gold prices continue to remain unchanged. Bullish speculators have put the future level at around `65,000.
Ranawade said, “Given the uncertainty in the equity markets, low yields on fixed income and the likely situation of global liquidity remaining abundant for the next one year, gold should continue to do well.” The fact is that few Indians with surplus funds think of gold as an investment option although they put a lot of their trust and funds on mutual funds. For most, gold is all about jewellery which can be redeemed in the time of crisis, if any, but not a monthly investment option.
Praveen Singh, AVP- fundamental research - currencies and commodities. Sharekhan, said, “We have been bullish on gold right from $1500 level and on silver from $16 level. We see gold prices rallying to $2500 in the next 18 months”. Though silver has also risen in tandem with the yellow metal, most experts tend to be a little less enthusiastic about it.
Ranade thinks silver is a better option for traders with appetite for high risk, and not the ordinary investor. “We do not recommend Silver as we believe it is more likely to be a short-term trading opportunity and retail investors are likely to get stuck in case a bubble builds up in silver,” he said.
Many Factors
However, nothing goes up or down in a straight line for long. There would occasional corrections, sometimes quite steep ones. So, it is required that the buyers should be prudent in their risk management. A successful Coronavirus vaccine at commercial level would dent the bullish picture of the precious metals, he said. A wide range of factors have contributed to the rise of gold prices to almost dizzy levels. They include the weakening of the dollar, the negative interest rate environment and the general softening of economy coupled with the harmful effects of the COVID-19 pandemic has pushed up gold prices.
Governments in India and other countries like the US have also played their part by announcing generous stimulus package to meet the pandemic crisis and ended up with an increased dose of inflation which was bound to influence the price movement of the glittering yellow metal.
Simply put, gold is attracting some amount of frenzied buying by companies seeking a hedge against rising inflation, and out of fear that inflation might further increase as some financially weakened governments may be forced to print extra currencies. “Gold typically thrives during periods of uncertainty and the current rally started sometime in October 2018 as global growth started falling and was further triggered by the uncertainty on account of the US-China Trade war,” Ranawade said.
Notable factors that conspired to edge on gold prices also include the low growth rate worldwide, the possibility of the US Federal Reserve further easing the monetary policy, and geopolitical concerns emanating chiefly from the souring relationship of the US and China over Hong Kong.
The COVID-19 situation has prompted an unprecedented USD 19 trillion of global liquidity as stimulus package from different governments- than three times of the stimulus given during the 2008-09 global financial crisis—causing an upheaval in the behaviour of different asset classes.
Equities valuations have skyrocketed against weak economic fundamentals while fixed income yields are moving in the opposite direction giving extremely low or negative returns. Real Estate is likely to be weak as 30 percent of global workforce is working from home in the new, almost surreal, normal.
It is possible that some of the liquidity created as part of the stimulus package may have perhaps moving into gold, he said.
Praveen Singh, AVP- fundamental research - currencies and commodities. Sharekhan said, “Huge stimulus leads to the debasement of the fiat currencies, too. Gold can’t be printed at will, thus value of gold in terms of fiat currencies is rising”.
Huge fiscal stimulus measures also stretch the finances of the countries. In an alarming development, global debt to GDP ratio has reached the record high level of 331percent. Stretched ratio could lead to yet another episode of sovereign debt crisis, which would be positive for the gold prices”.
Investors also suspect that the US Federal Reserve could embark on yield curve control like it did post World War II as the US public debt reaches the level seen during that time. If that happens, it would be highly inflationary but the rates won’t be moving higher, so that would be quite supportive for gold prices.Some analysts are taking the alarmist path saying that the global economic contraction may be three times more intense than the one seen during the financial crisis of 2008-2009.
In fact, there are signs that the virus contagion may last longer and in some cases get worse and further weaken the global economy, which was already weak due to the 18- month long trade war.
“Weak global economy means that there would be more stimulus measures and the global rates would remain low”, Singh explained. Gold has been in short supply as mining of gold has not been able to expand at the rate at which demand has been increasing. “This result Global ETFs, Central Bank demand and jewelry have been the primary demand drivers. Notably, Central Banks, which were net sellers prior to the Lehman Crisis, have been stocking up on gold every year,” said Ranawade.
With the addition of more stocks, the value of gold reserves with the Indian government rose to $30.57 billion (around `2.32 Lakh crore) by March 2020 from $23.07 billion in March 2019. The Reserve Bank of India (RBI) bought 40.45 tonnes of gold in financial year 2019-20, taking its total holdings of the yellow metal to 653.01 tonnes. Gold imports have fallen due to the rising prices. This has had a positive impact on the country’s current account. However, this positive impact is not going to last long.
Deepti Mathew, Economist, Geojit Financial Services said, “The trend of falling imports is likely to continue in the coming months as the economy is grappling with a consumption slowdown. Though, there would be some uptick during the festive season, it is unlikely to witness a huge surge in the gold demand, amidst the income uncertainty”.
Pandemic Disruption
Other Precious Metals
However, Ranawade is not far optimistic about long bull-run in Silver prices locally as well as in international markets.
Ranawade said, “Every time silver has risen, based on speculation, the rally has been short lived and I have no reason to believe this time it will be different. Industrial demand will fall and so will consumer, if prices rise too much. Silver mining and recycling (unlike gold) can match up to the demand.”
Gold to silver prices ratio reached record high of 124 in March this year as the global economy crumbled due to the havoc wreaked by the Coronavirus globally. The ratio soared as the investors piled into gold, shunning silver. The historical ratio is around 57. The ratio since March high of 124 has tumbled to around 70 currently as silver played a late catch up with gold prices on stimulus measures.
Singh is also not too optimistic about firm trend in Silver prices lasting long. Singh said, “As the global economy remains in a precarious state, it is difficult to see silver doing much better than gold from the current levels. For gold-silver ratio to drop significantly from current levels, the global economy has to do a lot better which doesn’t look probable in next two years.”