Faith In Gold Unshaken Despite Poor Performance

Gold analyst Sanjiv Arole notes that in spite of all the pessimism surrounding the yellow metal, most experts and market observers hope that gold will outshine all other precious metals in the second half of 2021.

Heisenberg’s uncertainty principle is an important aspect in quantum mechanics. The uncertainty principle implies that in general it is not possible to predict the value of a quantity with any arbitrary certainty, even if all initial conditions are specified. This uncertainty principle could easily be applied to predict the gold price in the current pandemic scenario.

Every January, the LBMA invites precious metals analysts from all over the world to predict the average price of each precious metal for the year in question. In the first half of January 2021, when the gold price averaged $1,887.5 per ounce in London, the analysts from all over the world predicted the average gold price for 2021 at $1,973.8 per ounce, up by over 11.5% over the actual average gold price of $1,769.6 per ounce for 2020. Ostensibly, the analysts took account of all the variables while predicting the gold price for the year 2021.

Most of the variables like low interest rates, infusion of trillions of dollars by central banks globally (US alone pumping in over $19 trillion at least), bond yields, strength/weakness of the US dollar, stock market performances (bubbles), geo-political tensions, predicted high inflation and above all, the unabated pandemic, are well known to even the layman. However, in spite of being armed with all the data and parameters that help in determining the gold price, the LBMA forecast for the gold price is still way off the mark.

As of 16th July, 2021, gold stands at $1,824.30 per ounce (London, pm fix), down by at least 8.2% from the predicted average gold price of $1,973.8 per ounce for 2021. The above underlines the uncertainty involved in gold price forecasting.

Gold bugs are in a quandary as they cannot fathom out the reasons for gold’s dismal performance in the current year. It would seem that gold was trapped in a quagmire and simply unable to extricate itself out of the $1,683-$1,907 per ounce range. It was only at the beginning of the year that gold seemed in a spirited mood to challenge its new peak attained in August 2020. The yellow metal smartly climbed to $1,930 per ounce on 6th January against the December 2020 close of $1,887.60 per ounce. But, thereafter, gold has twice dipped below towards $1,680 per ounce in March 2021 and although it climbed back to $1,907.70 per ounce on 1st June, 2021 (London, am fix) on positive news, it slumped back to $1,755 per ounce by 29th June  when it transpired that monetary easing would cease by 2023 and that interest rates too would be raised in 2 years.

Then, the news that Russia had de-linked itself from the US dollar also appeared to have hurt gold. The recent Federal Open Market Committee (FOMC) meeting held this week appeared to be slightly positive as the US Fed maintained a dovish stand. That, in turn, saw the yellow metal climb back to $1,832 per ounce on 15th July, 2021.

Gold’s predicament is that despite all the positives, no gold rally is able to sustain itself and invariably fizzle out.

Consider the following: (a) The USD has been sliding against all currencies, including the rupee in the current year.  (b) Everyone predicts that the stock market bubble(s) all over could burst anytime. (c)  Inflation is expected to rise as a result of stimulus aided recovery of economies across the world. (d) The US recently pumped in trillions of dollars as the Biden administration managed to push a stimulus package through the US senate. Most of the countries are following suit, including the EU. (e) Geopolitical tensions around the world continue even during the pandemic (the Middle East, the Gulf and other parts of the world have) . The Indo-China eyeball-to-eyeball confrontation across the Himalayas, by two nuclear powers, has been a feature since mid-2020. Add to the above, we have the new Afghanistan explosive cocktail after the withdrawal of US and NATO forces from Afghanistan. All the above conditions have been in place over the last few months. Yet, there is no gold rally. In fact, gold has declined from $2,067 per ounce last August to $1,824 per ounce levels on 17th July, 2021.

It would seem that the parameters that seemed to work favourably for gold in 2008 and 2011 appear not to be working for gold during this pandemic period. The trillions of dollars printed by the US and the rest of the world appear to have been used for speculative purposes by beneficiaries either by investing in the stock markets (most aver that that bubble could burst anytime) or even cryptocurrency. Or else that money has been splurged on consumer goods or other such items. Similarly, the very low interest rates have failed to spur gold this time. The weaker dollar, high inflation, too, has failed to shore up gold. Moreover, gold prices have seen their worst one-month decline in June 2021 since November 2016. That appears to have hurt gold more. Then, central banks are not heavily into gold purchases and net gold purchases in 2021 till May were 235 tonnes. ETFs are down by 130 tonnes year till June end. And the total global ETF holdings are 3,631.34 tonnes, way off its peak of 3,909 tonnes in October 2020.

Indian overview

 After a tumultuous 2020, wherein the pandemic affected the demand for the yellow metal to multi-year lows, gold imports fell sharply to around 320 tonnes for the Jan-Dec period. However, after an initial rise, the gold price fell sharply to $1,683 per ounce by 30th March, 2021. This was reflected in the domestic gold price, as the price went well below Rs.50,000 per 10 gms (even Rs.44,190 per 10 gms a few months ago) down from an all-time high level of around Rs.56,000 in 2020. As a result, gold imports surged and peaked to over 160 tonnes for March 2021. The sharply lower gold price, the improvement in the economic scenario, government largesse, good agricultural incomes and huge pent up demand and restocking at all levels in the gold value chain led to high import numbers during March 2021.

However, the rapid emergence of a fatal second wave of Covid-19 that saw infections in India scaling 4,00,000 and above per day at its peak and daily deaths reaching staggering numbers have propelled India’s Covid-19 cases rise above 31 lakh and fatalities well above 4 lakh. This resulted in gold imports falling to just 90-odd tonnes in the second quarter (April-June, 2021). With lockdowns being imposed in many cities across the country since April, and restrictions in place even after easing of lockdown, demand for gold has fallen with buyers avoiding crowded places for new purchases or even to sell their old jewellery. In Mumbai, shops have to close by 4 pm making it unviable for buyers to venture out during the evenings. Gold investors/buyers, as a result of the battered economy, have been forced to put gold buying on the back-burner. Moreover, mandatory hallmarking, too, has been instrumental in the trade pushing the pause button.

Scrap: Only last week, one of the leading gold NBFCs put up a three- page advertisement in a local newspaper at a major centre in Kerala that it would auction the pledged gold it held. Thus, over 25,000 gold items are to be auctioned in July alone. That, too, in the foremost gold consumer regions of the country; this reflects the depth of the economic impact of the pandemic especially after the second wave of Covid-19.

The inability of the people to get back even their small gold items pledged during lean times points to a deeper malaise in the economy. This auction is only for a region in the gold-crazy consumer state of Kerala. If one extrapolates the same for the entire country, the numbers could be humongous. Already, there are reports about people selling off their family heirlooms to offset job losses, closure of business, etc. The pandemic is said to have pushed millions into poverty and rendered many bankrupt, thereby forcing them to sell gold as a last resort to stay afloat. There are some estimates of scrap inflows to be roughly between 150 tonnes to 250 tonnes or even above that for the current calendar year. However, there could also be an element of unofficial gold entering the mainstream via the inflow of scrap.

Hallmarking: At long last, hallmarking became mandatory in India from mid-June. It would seem that the BIS  and the Government were ready to bend backwards for the hallmarking rollout. It took into its stride a stay on punitive action against erring players (retailers, manufacturers and even hallmarking centres). Then, it rolled out the hallmarking programme in only around 250+ plus districts in India, added three more purity parameters for hallmarking, made concessions on turnover, deadline for application of hallmarking and even watered down a few more parameters. This also caused an official from a trade association to say in jest that the government wants all players to come under the ambit of hallmarking by offering lollies and then it would slam the door shut on erring players.

Predictably, in the last couple of weeks there have been reports of erring hallmarking centres giving away fake hallmarked pieces being brought to book. It would seem that the Government is serious about making the gold industry transparent, and GST along with hallmarking would make it possible for it to better regulate the so far unregulated industry. The BIS conducted raids on hallmarking centres in Mumbai, Delhi and other places and booked the erring players for not following the new hallmarking norms.

Hopes High On Gold

Coming back to the global scenario for the gold price, `Gold bulls’ are still optimistic despite being perplexed by gold’s behaviour. In spite of all the pessimism surrounding the yellow metal, most analysts, market observers and experts still believe that gold will outshine all other precious metals in the second half of 2021. The mantra for investors is to buy at lows and sell at highs.

Global investor John Templeton believed that the best time to buy is when there is maximum pessimism and vice versa when there is maximum optimism. It would seem that right now gold is grossly undervalued and overlooked. But, the fact is that all traditional gold drivers are in place and gold seems almost at the right place and the right time.

Gold enthusiasts believe that record printing of the US dollar by the US Fed has resulted in the dollar losing a substantial portion of its value. No doubt cryptos (bitcoins) have benefited, but then they cannot be issued unabated out of thin air. Thus, gold could still benefit from this situation as there are no fresh gold stocks coming out of new mines in the near future. Then, with inflation at 13-year highs of over 5%, it could add favourable winds to gold’s sails and help the yellow metal regain its position as a hedge against inflation. Finally, bond yields were 2.5% not so long ago, however, they are now down to nearly 1%, closer to zero in real terms. That could provide the ultimate thrust to the gold price. Gold bugs pin their hopes on all of the above. Else, gold is still precariously perched!

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