GOLD - TO BE BULLISH OR BEARISH?
By Ruma Dubey
Gold has been breaking all the usual set trends. In the good old days, it was very easy to draw inferences. If the US dollar is appreciating and the rupee is falling fast, gold prices used to go up. That was like a fact, something like the earth is round fact. And when crude slipped, gold rose. But this time around, we are witnessing all these so-called truths or trends being broken.
There is tremendous risk and uncertainty in the markets today, not just in India but globally. The Euro debt crisis takes center stage once again with France electing a socialist party and the Greek also showing their disgust for the ruling Govt. It was clearly a shout of protest from the people that they wanted a change and wanted better measures then mere austerity to tackle the debt crisis. Hollandes win makes things a bit shaky on the ‘Merkozy’ front. Will he show Merkel who is in charge or will he go with Sarkozy’s soft stance? So at the moment, things seem uncertain in Europe. No need to harbor any greater than thou feelings over the Euro mess as we have a bigger mess on our very own domestic shores. The burgeoning trade deficit, the uncertainty over GAAR and a complete policy paralysis has made people and the markets despondent. Markets are trading extremely low. Thus overall there currently seems to be a lot of uncertainty and risk. Naturally, at such times, one would have expected gold, the favourite hedge for all risks, to move up. But this time around, despite the risks, people have given the thumbs down to gold as a risk haven.
Yes, what happens in the coming days in Europe and USA will decide the price of gold but currently, they both do not seem on the pilot’s seat. Looks like gold is on auto pilot? And this auto pilot is being programmed by the demand in India and China. Two countries with the largest population on earth, with their domestic consumption alone, drive up the gold prices. China is buying gold like there is no tomorrow, like it expects gold to soon get out-of-stock. It is stated that Beijing bought around 500 tons of gold in 2011, double what it bought in 2010. And the biggest buyer in China is none other than its central bank, People's Bank of China. This frenzy to buy the yellow metal is out of this urgent need to diversify its asset holding. China has the largest foreign exchange holding of any country in the world, which is about one trillion US dollars. The risk is too high and now the Central bank is trying to mitigate this all-eggs-in-one-basket syndrome by diversifying into gold.
To do this, China’s central bank is infusing its gold mine companies with capital, allowing them to acquire gold mine companies abroad, following which the mined gold will be imported into China, where the buyer will be the People’s Bank of China. Zijin Mining Group, the largest of China’s gold mining companies has set aside 5.5 billion yuan ($880 billion) of cash for acquisitions overseas. The country has many huge mines with a capacity of over 390 tonnes of gold. The Central Bank has banned the export of this gold and all gold miners have to sell necessarily to the People’s Bank of China. Thus China in this pursuit to stack up its gold reserves is using its own mining companies to mop up all gold around the world! But the logic being given is that if these mining companies of China are able to meet the required demand of the People’s Bank of China, then the gold prices might not just runaway like last year. Unlike India, Chinese economy is doing better and its inflation is actually showing signs of easing, which in turn might herald more economic easing policies. And if that happens, the risk aversion factor is gone and thus buying gold as a safe haven by the Chinese might take a back seat.
In India, costs remain high and the falling rupee and deteriorating economic conditions have curtailed buying. Though gold could be seen as a safe haven in this scenario, the high prices are a deterent and with the Govt also imposing various taxes on buying gold, the lid is currently tight on gold buying. Import of gold fiscal is expected to come down. Buying was subdued this time during Akshaya Tritiya, indicating that overall demand is subdued.
Bottomline – will gold prices surge or not? Retail demand is muted but if central banks continue buying, then there is a strong case for a price rise. But central banks will watch how things evolve in Europe and keep an ear out for any quantitative easing. For now, though the Chinese case makes a strong pitch for bullish trends, without demand from India, it alone cannot move the gold prices.
PS: Traders buy more gold when price is rising but when it starts declining, unlike stocks, they do not take positions.