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Special Report on Gold
Diwali 2014
Gold is money and for that matter, a store of value!
Some call it genuine wealth, others call it currency!
The yellow metal has elegantly retained its worth over decades and centuries and has been the favorite of investor fraternity. Asians particularly have always been
charmed by investment in gold and have realized its propensity to preserve wealth. Dhanteras and Diwali, the festivals known for bringing fortune to lives attract gold
buying, as it is the ultimate symbol of wealth and prosperity. Gold and gold jewelry bought and worn during this season signify ever growing good fortune. Sentiments for
gold generally fortify in India during Hindu festival of Diwali and Dhanteras. Most Hindu families prefer purchasing gold during Diwali. Purchasing gold during this time is
religiously significant as it is considered auspicious. In India. the ritual of buying gold is equivalent of inviting Lakshmi, the Goddess of wealth and prosperity at home.
What’s driving Gold prices:-
Positives
Seasonal demand knocking the door– Diwali is here and steep fall in the price of gold has brought cheer to
Indian consumers as occasional buyers generally rush for buying around this time. Genuine consumers are expected to book for future delivery keeping in mind the wedding season. The fall in gold prices is a welcome opportunity, as they have been awaiting a correction from sustained high prices since long. India’s monthly gold
purchases are set to surge along with the premiums in local market amid expectations of surge in gold sales.
Market participants are expecting a 30 per cent rise in sales this season.
IMF slashing growth forecasts- In its latest report the International Monetary Fund (IMF) has cut its global
growth forecasts for 2014 and 2015 and warned that the world economy may never return to the pace of expansion seen before the financial crisis which has once again shifted the focus on gold. The IMF expects the global
economy to grow 3.3 percent in 2014 and 3.8 percent in 2015, down 0.1 percentage point and 0.2 percentage
point from its July’s forecasts respectively. This report has come as a respite for gold bugs who have been tired
of weakness in gold prices since last one year.
Geo-political problems more painful than ever- The crisis in Ukraine and surging geopolitical
tensions like that in Iraq looks set to obstruct global growth and risks to growth are largely to the
downside. Russia is the fourth-largest producer of gold, producing 7 percent of the world's total
supply and at present they are slapped with sanctions, and their problems with Ukraine are not
near to ending. The risk of conflict between Russia and the West is more than a short term risk
and is posing as one of the greatest geopolitical challenges since the end of the Cold War and
therefore, it is likely to have a more material impact on gold prices as we move forward. If Russia
retaliates by banning the exports of all precious metals and by selling some of their large foreign
exchange reserves and diversifying into gold, silver, platinum and palladium, it would likely lead to
higher prices for all precious metals.
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Special Report on Gold
Diwali 2014
Prices near production cost- The recent steep fall in gold prices have raised questions of miners’ viability as
the cost of production is estimated around $1,200 per oz for most of the mines. Experts believe miners may
cut production to arrest the free fall in gold prices. Production cut would help prices form a base and may support gold prices going forward.
Fed’s stance on interest rates- Gold prices are likely to be supported after the minutes from Fed’s recent
meeting showed policymakers have some concerns about downside risks to the global economy and the dollar's strength. They reassured investors that its first interest rate hike would not come until it deemed the economy could withstand it. The Fed indicated that there will be a considerable time between the end of QE and
the first rate hike. Also there will be a more gradual increase in the federal funds rate thereafter. This is likely
to result in sustained liquidity in global financial system and gold is likely to be primary beneficiary in that case.
Central Bank Gold Holdings
Central bank buying- Central banks have remained on the buy-side of the gold market in this year till now.
Central banks, net buyers of gold for 14 straight quarters, underpinned bullion’s losses last year that were the
most since 1981 and may increase purchases to as much as 500 tons this year after adding 409 tons last
year, according to an estimate. The largest foreign holder of US Treasury bonds, China has been hiding its
bullion reserves since 2009, when it revised its reported holdings 75% higher to 1,054 tonnes. Beijing is widely suspected of buying gold since then, with unreported central bank purchases explaining a gap between
China's private-sector demand and visible supply.
Negatives
Feeble demand from China and India- As per WGC, gold jewelry demand fell by 30% y-o-y in Q2-2014 led
by broad declines in consumer demand from China and India. This decline in global gold jewelry demand
helped to influence a 16 percent drop in overall gold demand (investment, central banks and technology) to
963.8 tons as per a report.
Weak investment demand: Lower demand from China, which surpassed India as the world's largest gold
consumer last year is keeping prices under pressure. Premiums demanded in China topped out at $37 an
ounce last year but have fallen into discount this year. Holdings of SPDR, world’s largest gold fund have been
on a consistent decline, an indication of waning investment demand.
Surging Dollar-Dollar index has surged to multi month highs on back of continuous monetary easing by Europe, Japan as they rampantly pump their currencies in financial system while the end of bond buying program and expectations of interest rate hike in US is an equally important factor for the rally in Dollar Index . A
stronger dollar puts pressure on the gold prices as it hampers its safe haven appeal.
Expectations of interest rate hike- There have been expectations that US Fed would hike interest rates
sooner than anticipated in early 2015, which hammered down gold prices in recent times. Gold prices will
typically weaken when rates go up as investors seek out higher-yielding assets and dump non-yielding asset,
gold.
Special Report on Gold
Diwali 2014
Plunging Crude Oil Prices: Gold and crude oil have demonstrated positive correlation in long term. Rise
in crude oil prices is a cause of inflation and the effect is increased buying of gold as it serves the purpose of a hedge against inflation. Recent plunge in oil prices has capped inflation globally which has
proved detrimental for the demand of gold. Financial assets perceived as safe haven e.g precious metals
tend to increase in value with rising inflation and vice versa. So, recent decrease in the price of crude oil
might translate into lower bullion prices going forward.
Improving U.S economy- The US economy is charging forward, with labor market on a roll as unemployment plunged below 6 per cent for the first time since July 2008. Housing market is also showing
signs of recovery. Safe assets like gold generally get a beating when economic conditions improve.
Price outlook
Given the spectacular historical returns, the recent correction in the gold prices, that have brought
them to a nine months low, might well turn out to be another lucrative buying opportunity over short
to medium term. Also, the rally in the dollar index looks overdone and unsustainable given the extremely high levels of debt in the US and the currency devaluations around the globe. Any correction
in the dollar will offer support to gold prices. Also, as the central banks of Europe and Japan are increasingly coming out with their monetary stimulus measures, even as US Fed is on course to end it,
it would be a boost for gold prices. Central banks of China and Russia also continue to add gold to
their reserve holdings.
We advocate buying in the yellow metal at levels of around Rs26500-26200/10gms in a staggered
manner, while Rs25000/gms at MCX and corresponding levels of $1180/ounce at COMEX, remain
major support areas that have offered base to the prices since long. Only a breach of these levels
would mean further downside for the yellow metal, else it is likely to resume an upward move. Along
with this, a sustained closing above Rs 28000/10 gms and $1250/0z would bring the bulls back in
business, which can then can push the prices sharply higher in the short term.
Gold prices have a long standing history of around 30
years, wherein they have generated positive returns in Indian markets in spite of the fall witnessed in International
markets, due to the gradual depreciation of Indian rupee,
which makes the case strong for investment in gold in India. Gold when added to a portfolio results in higher risk
adjusted returns as it balances a portfolio by reducing its
volatility, due to its negative correlation with other asset
classes. At any point of time investors are recommended to
have around 15-20% gold in their portfolios as it leads to
better risk adjusted returns and is also called a crisis
hedge.
Research Team
Sugandha Sachdeva | In-charge-Metals, Energy & Currency
Himanshu Arora | Analyst, Precious Metals and Energy
Manash Goswami | Analyst Precious, Metals and Energy
Himanshu Gupta | Analyst ,Base Metals & Precious Metals
Maneesh Sharma | Analyst ,Base Metals
Source: Reuters, investing.com, briefing.com
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