Increasing power struggle between the US and China has heightened geo-political tensions among the powerful countries. These mighty nations trying to prove their supremacy over others has been the root cause for market volatility across the board. And, the fear factor has once again brought to fore the flavour of safe haven for investors as far as gold is concerned. Back home, things are also far from promising. Uncertainty has gripped Indian markets and the volatility will continue to prevail till the ensuing general elections.
These trends will have an immediate impact on gold, globally and locally, and prices will firm up in the near to medium range.
Dinesh D Parekh, Mumbai-based bullion expert, feels the firm trend in bullion will continue in 2019 and for some more time after that. “First, the continuance of this trend is because of the recent US government shut down and its impact on the US currency, which has weakened. This has helped in firming up the gold prices in the international markets. Second is the US-China trade war. Third, gold prices are to remain strong because of the sustained demand from India and China,” he added.
Bhargav Vaidya, Chartered Accountant, and Hedging Advisor, Mumbai’s gem, jewellery and diamond sector, said, “We are dependent on rupee-dollar exchange rates as far as the price of gold is concerned. With weak rupee and strong dollar, gold prices go up. There is an inverse relationship between rupee and gold prices.” He further added, “I see international gold price in the range of $1,250 over the next four to six months while over a period of the next four to six quarters, I feel, it will move in the range of $1,361 (high) and $1,221 (low).”
Substantiating his price forecast, Vaidya said, “The centre does not want rupee to become stronger because it may encourage cheaper imports (dumping, crossing the borders) from the neighboring countries and have its impact on the current account deficit.” Hence, rupee will stabilise in the range of Rs70 to 72.50, in short to medium-term, he explained.
India is the second largest consumer of gold in the world after China. We consume 23–24 per cent of global gold production annually as compared to 25 per cent consumed by China. India imports gold to the tune of 600–800 tones annually, out of which 35–40 per cent of India’s requirement is met through gold dore, which is a semi-pure gold silver bar weighing 25 kg each. It is basically an unrefined form of gold at the mining level. It also offers a duty advantage of 0.5 per cent.
Sunandh Subramaniam, Senior Research Analyst, Commodity, Choice Broking, said, “Gold has always been a safe haven during the time of domestic and international turmoil. Since India has been the highest importer of gold in the global markets, gold prices are estimated to remain bullish for the mid-term and long-term due to gradual rising demand for gold investments and in the jewelry sectors. Moreover, gold prices are expected to remain supported with depreciating rupee with respect to the dollar, which usually increases the cost of import bills.” However, Subramaniam further added, general elections 2019 in India have little to do with the movement of gold as the country’s overall fundamentals, such as GDP growth rate and inflation scenario, has been good.
Professor Arvind Sahay, Faculty, Indian Institute of Management, Ahemadabad, (IIM-A), said, “As far as political uncertainty is concerned, gold prices are expected to go up but as far as economic uncertainty is concerned, it will become a safe heaven and the prices may bump up.” Prof. Sahay is also the chairperson of India Gold Policy Center (IGPC), a center of excellence at IIM-A, a think tank on gold, sponsored by the World Gold Council.
Parekh said, “As a result of the strong undercurrent in the bullion demand, the price target of gold for the Indian market in the calendar year 2019 will be Rs34,000 for 10 gms while the long-term (one to three years) price target would be Rs37,000 per 10 gms.” However, according to Parekh, local traders in Mumbai’s Zaveri Bazar predict that prices will hit the Rs35,000 market by May 2019 itself. The 24 karat gold prices for 10 grams hit Rs34270 following presentation of Budget by Finance Minister Piyush Goyal on February 1, 2019.
A firm bullish trend in the gold prices is expected to last for a fairly longer period (four to six quarter). In such cases, what are the investment options available for small investors and how should they proceed?
There are several ways to invest in gold. They include buying and selling of physical gold, gold futures and options, gold exchange traded funds (ETF), gold sovereign bonds and e-gold. Each option has its advantages and disadvantages.
Physical gold has the highest amount of risk when compared to futures and physical delivery. Traders and investors who are ready to take up the risk can buy gold, said Subramaniam and added, “Gold ETFs, though less risky than futures and options, also provide an option of holding gold in electronic form, avoiding problems of storage. The tax treatment also gives gold ETFs an advantage over the bullion.”
Moreover, we can buy gold units equivalent to even half a gram of physical gold, allowing us to invest smaller amounts in the precious metal. Monthly scheme of gold investments, also known as systematic investment plan, serves as a low-risk investment tool for gold, informed Subramaniam. For monthly schemes, an investor does not require a demat account, which is required in case of ETFs. However, this convenience comes at a slightly higher cost in form of annual expenses of around 1.5 per cent of asset under management, whereas it is around 1 per cent for gold ETFs. To conclude, both gold ETFs and monthly schemes are better than the others. However, it all depends on the investor and his risk appetite.
However, sovereign gold bonds are the best choice for small investors in India, opined Vaidya. “Because, you get the full price of gold when you sell it and on top of it, you get 2.5 per cent interest. The buying and selling happen at wholesale price, so small investors do not have to worry about the cut in price. You do not have to worry about storage cost, insurance cost or purity of gold. Also, when you buy gold, it is issued at a discount.”
Vaidya further said, gold is a disciplined asset and it is a store of value. It does not give you extraordinary returns, but it ensures that it protects your capital. “I advise people to keep 10-15 per cent of their investment in gold. It will be able to beat inflation at international level.”
The Indian Government is well aware of the fact and it is going to form its policies based on this. It is likely to focus on promoting the domestic gold industry and exports of gems and jewelry, which contribute about 15 per cent to India’s total merchandise outbound shipments.
In last February, then Finance Minister Arun Jaitley had announced formulation of a comprehensive gold policy to develop gold as an asset class. Government think-tank Niti Aayog, meanwhile, had also suggested, in last August, to review and revamp the gold monetisation scheme (GMS) and the sovereign gold bond scheme, besides setting up a gold board and bullion exchanges across the country to have greater financialisation of the yellow metal. GMS needs a revamp because when the scheme was launched in November 2015, it was not immensely successful and could mop up only 14 tones of gold. This is nominal considering the fact that India has 15,000 tones of private gold, which is highest in the world.
IGPC has been associated with the Government for almost last three years on this. Gold policy is driven by Department of Economic Affairs (DEA), Ministry of Finance. IGPC is one of the members of the committee set up by DEA and is also part of a working group on gold set up by NITI Ayog.
In its last meeting held in the last week of December 2018, it was recommended that the Gold Spot Exchange that Government is planning to set up should follow the Shanghai Gold Exchange model. The meeting also discussed the criteria to select its members and ways and means to operationalise the exchange. It further discussed various options available to revamp GMS.
According to well-informed sources, the centre is at an advanced stage of setting up of spot exchange.
Other important aspects of the gold policy are standards and certification with respect to purity, setting up bullion banks and creating an ecosystem. These factors are crucial for the development and growth of the spot exchange.
Explaining the importance of a spot exchange, Professor Sahay said, “Spot exchange is the second dimension to the gold policy. There also has to be a certain minimum unit for the exchange to get going. We have suggested 10 grams as the minimum and 50 grams as the maximum unit as the tradable quantity on the spot exchange. The quantity is important because, this creates liquidity. And liquidity is required and helps in price discovery.”
Even after being the second largest consumer of gold, India is still the price taker and not the price setter. To become a price setter, coveted status currently held by London Bullion Market Association (LBMA), it needs to have exhaustive bullion infrastructure in place.
“We will have to define standards and certification because purity is an important issue in the spot market, where physical exchange of gold takes place. Gold standards and the certification need to be internationally defined and must have international acceptability,” said Prof. Sahay.
He further added, “If I have to be a price setter, whether it is Bureau of Indian Standards or LBMA, the certified gold traded on our spot exchange should be acceptable in London as well as in Shanghai. For that I need to sign Vienna convention and have to follow certain processes which are much more robust in nature.”
Several central banks across the globe are accumulating gold. For example, China has been doing this for past 15 years, Russia for past five years while India has just started. China had a gold reserve of only 600 tones in 2006, according to Parekh, which it has increased to 2,000 tones in 2018. The Russian gold reserve has also swelled to 2,000 tones in 2018. However, both of these economies have a long way to catch up with the US, which has gold reserve in excess of 8,500 tones. “Gold cannot be destroyed and has a store value, which is the prime reason people and institutions are equally attracted towards it,” said Vaidya.
“One surmise, and this is a good educated guess, whenever a new super- power emerges, look at the history, its currency becomes the reserve currency of the world. Its currency denominates all the trades and becomes the one which other people accumulate as foreign exchange. China is taking steps in that direction,” Prof. Sahay said and added, “The Chinese move is to set up a gold spot exchange where you can convert Yuan into gold. You can argue, this is a plan to make China a super power financially also.”
“The sharp rise in gold reserve of these two countries is part of their efforts to replace US Dollar from its distinguished place of universal currency,” Parekh also opined.
China has a long way to go before it catches up with the current biggies of the trade. “LBMA is still the biggest and has the best model of importing, where both private players as well as government-owned banks and institutions are allowed to import gold. World over, banks have failed in bullion trading as this trading does not flourish under restrictive regime. London is an exception. There is so much talk about Shanghai, but I do not trust their (Chinese) trade figures. About 80-90 per cent of world’s central banks are storing their gold in London,” said Vaidya.
“Whatever physical trade we do annually, LBMA is trading that much on a daily basis,” concluded Vaidya.
yagnesh@outlookindia.com