By Satyajit Mishra
Gold has qualities desirable in money. It is rare, durable, divisible, easily transported, easy to identify and has a high value to weight ratio. Each unit is identical and equivalent to the other units of gold.
Gold standard was the basis for money for all of human economic history.
In India gold is the ultimate source of wealth that can be pawned or used as security to raise money quickly. A child’s baptism or eating of the first solid food, the dowry system during marriage, the love for jewellery and ornaments and the Indian women’s belief that the only real property is gold has given gold it’s mythological power.
India has the world’s third largest current account deficit, which is approaching nearly 90 Billion USD, driven by a large appetite for gold and oil imports. With 31,000 tonnes of commercially available gold worth 1.4 Trillion USD (at current prices) and RBI’s 557.7 tonnes of gold in its reserve. India still has a high penchant for importing gold. India imported 860 tonnes in 2012 alone.
Central banks around the globe would have always liked to increase the gold reserve after the 2009 financial crisis. The same was also been observed during the recession in Europe in 2011. The reason why central banks of countries wanted to have gold reserve was both political and financial.
Gold is used as collateral, for a loan to avoid sovereign debt default. During the 1991 crisis, India flew 667 tonnes of gold to Europe as collateral against sovereign debt. Central banks of countries would always like to diversify their investment by investing in gold. However, a turn in the gold price cycle is exhilarating after a 12 year rally. As the US economy recovers and gains momentum there will be a reduced forecast for the metal through 2014.
The evolution of gold’s price has always seen waves of ups and downs. After President Nixon took the US off the gold standard, gold gained tremendous value, only to crash roughly to half of the peak value in 1980.
Gold failed to reach the 2,000USD per ounce limit. The long-predicted psychological level could not be reached failing the predictions of prestigious investors and renowned financial institutions.
Gold could barely hold the 1,700USD level in 2012, despite Citibank predicting a whopping 2,400USD.
In December 2012, gold prices dropped to a further 1,680USD. Evidently, gold is failing to meet expectations.
Goldman Sachs cut its 2013 gold estimate to 1,545USD an ounce from 1,610USD with a year-end target of 1450USD. This works out to Rs 33,250/ 10 gm (assuming 1usd=65rs). This decline further continues as in 2014 the forecast is trimmed to 1,350USD from 1,490USD and with a yearend target of 1,270USD. This works out to Rs29,200/ 10 gm (again taking 1usd=65rs). Clearly, the prices of gold will fall.
Other forecasts include Societe Generale’s estimate of gold falling to 1,375USD by the end of 2013, as a U.S. recovery will lead to rising interest rates and Credit Suisse Group AG cutting its 2013 estimate by 9.2 percent to 1,580USD. Deutsche Bank AG has also cut its 2013 gold outlook by 12 percent, citing a strengthening dollar and a lack of haven buying.
Gold dropped 5.8 percent this year on speculation that the Federal Reserve may cut its stimulus amid an economic recovery. The gold price is in bubble territory. Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, declined to its lowest level in over 2 years.
The graph below shows gold prices in 2012. You don’t have to be able to interpret the charts. Simply observe the price of gold. Observe the “humps” during the 2012 period. It clearly indicates that gold doesn’t have the same energy to rise. The “humps” are abrupt bull runs followed by sharp corrections. Almost every time gold gained strength, it took a dip very soon.
However the graph below shows there has been an increase in the gold price in Jan 2013 and gold traded horizontally till April, reflecting uncertainty. During this period the value of the USD to the INR remained relatively constant at 54.7 rs in 1st Jan to 53.75 rs on the 4th of May. Post May however the USD has regained its strength. That has reposed the confidence of the investors in dollar as a currency and in dollar bonds. Investors now prefer USD over gold. This oscillating psychology of the investors over the demand for gold will always remain constant. Therefore, internationally the price of gold is heading south. However gold price would behave in a different way in the Indian scenario. The Indian rupee has weakened almost 13% from April 2013 to July 2013. This is because internationally gold is priced in USD; therefore while gold prices have fallen in the world, the price of gold has been on the rise in India since July.
Warren Buffet once famously said that gold is incapable of soaking up new production and that the gold we own does not do anything. At the end of the day gold is just an ounce of gold worth, whatever someone is willing to pay for it. Mr Buffet says with all the gold in the world amounting to 9.6 trillion USD, it is in a bubble phase, He used the internet and housing bubbles as examples of rising assets that fuelled their own fire until those bubbles burst.
To conclude it is to be noted that gold performance is driven by fear. It has had a 10 year bull market largely due to fear and lack of confidence in the marketplace. It is worth only what someone else is willing to pay for it.
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