Gold Prices & The Hidden Chaos

Gold analyst Sanjiv Arole tracks the radical ups and downs in the price movement of the yellow metal through 2022.

In accounting, compensatory error is an error in calculation or recording accounts that is equal in amount to an opposite mistake so that neither affects the final total. It often camouflages a far more serious inaccuracy even though the trial balance has tallied. Gold, too, has its own set of compensatory errors.

Let us first look at gold price movements during the year. Gold closed in 2021 at $1,805.85 per ounce and opened in 2022 at $1,809.05 per ounce. And just as we neared the end of the year, the yellow metal was around $1,798 per ounce, fractionally below the price at the start of the year. Even the average gold price for 2021 at $1,798.61 per ounce did not seem to budge at all with an average gold price of a trifle over $1,800 per ounce.

So, on the face of it, gold had a very dull and flat year. In accounting terms, the trial balance appears to have tallied. However, nothing could be further away from the truth. For, there was great turmoil on the gold price front. While on the surface the sea was very calm, it hid a tsunami underneath.

Consider the following:

a) Buoyed by the Ukraine war, 40-year

b) high US inflation, fears of yet another Covid-19 wave, runaway oil prices, geopolitical tensions, et al saw gold surge by over 14% to $2,077 per ounce on March 8, 2022 (intra-day).

(b) Then, as the US Fed chief cracked the whip and embarked on a high interest rate regime to tame the 40-year high inflation, gold faltered. Consequently, as the USD strengthened, gold went into a tail-spin and fell to $1,618.20 per ounce on September 28, 2022 (, London am fix). In November, the gold price was even within touching distance of $1,600 per ounce (intra-day). The yellow metal declined by almost 13% from the price at the start of 2022. The range, between high and the low gold price (both intra-day) during the year to-date was around 28-29%.

The average gold price was around $1,872.24 per ounce in the first six months of the year and in the second half, it declined sharply consecutively in the first four months only to recover slightly and end the second half of the year much lower at $1,728.75 per ounce. However, most of the price recovery was short-lived as Jerome Powell’s shadow overwhelmed all positive news for gold. For, during most of the second half of the year, gold was either battling to stay afloat above $1,700 per ounce and even $1,600 per ounce levels or facing stiff resistance to scale the $1,750 per ounce, $1,800 per ounce or even dreaming to cross the $1,850 per ounce barrier. Forget regaining touch with $1,900 per ounce mark or once again getting all time high levels of $2,000 per ounce plus levels in its sights.

So much so that almost all analysts in the LBMA annual precious metals forecast are off the mark as we near the end of 2022. Gold was predicted to trade in a $1798 per ounce range with a high of $2,280 per ounce and a low of $1,500 per ounce. The highest average gold price predicted for the year was $1,965 per ounce, while the lowest average price forecast was at $1,630 per ounce. But, by a remarkable coincidence the average of all the average gold price forecast for the year was, believe or not, $1,801.9 per ounce, just fractionally higher than the average gold of $1,798.61 per ounce for 2021.

Gold’s own set of compensatory errors to hide the upheaval in the gold price during the year. Not for nothing have wise men not trusted statistical numbers blindly.

Indian Market

In the context of the domestic gold market in India, compensatory errors in the demand-supply equation have a totally different connotation. Now, on the demand side of the equation all components of demand are estimates (be it jewellery, coins, bars, studded jewellery, for investments, et al). For, the majority of the gold market is still a cottage industry in the unorganised sector.

There are very few players who are listed and whose numbers are available easily. The sheer number of retail and manufacturing units make it impossible to have hard numbers on the demand side. In reality, most the demand figures emanate from supply side numbers. If these are hard numbers then there is still some relevance to the demand estimates.

If one looks at supply side, one has imports as well as scrap into the markets by way of sale of old jewellery and purchase of new jewellery in exchange of old gold jewellery sales. So, the scrap number on the supply side is at best an estimate. Moreover, the definition of scrap according to global research outfits is only sale of old jewellery for cash. Whereas, the gold markets consider both sale of old jewellery for cash, as well as exchange of old jewellery for new as scrap. This does complicate things and has an impact on scrap numbers. The hard numbers on the supply side are essentially imports of gold bars and gold dore as well as gold deposited under GMS or purchase of SGBs, Gold ETFs and Digital gold. But, the elephants in the room are smuggling of gold as well as export of gold only for melting and sending it back as imports.

Probably, the obnoxious Gold Control Act gave birth to gold smuggling during its reign from the early 1960s to 1990. Then, gold was smuggled in dhows from Dubai and it would not be an exaggeration to say that Dubai prospered mainly due to India’s high tax/duty regime, particularly in gold. Given the insatiable appetite for gold in India most of the gold consumed here was smuggled into India as the premium on gold price in India over the international price was at time higher than 60%.

However, as the gold imports were opened up, post-liberalisation in 1991 and the obnoxious act abolished in 1990, first under SIL, OGL and then opened up gradually, smuggling declined quite dramatically. So much so, that when the import duty on gold was made Rs.100 per 10 gms for pre-numbered serial bars of metric weight around the year 2000, smuggling almost vanished overnight.

The hawala rate of the USD was almost at par with the official rate of the same and the parallel economy was struck a vital blow. To top it all, the DRI (Directorate of Revenue Intelligence) stopped monitoring gold imports. But, the CAD crisis in 2012 saw gold being treated as an accused, tried, prosecuted and sentenced by those in authority.

Within a very short time the duty was increased first to 1% and very rapidly to 10% in 2013. Smuggling returned and though the routes and modes were different around 100-300 tonnes of gold was smuggled from 2012-13 onwards.

It was only during the pandemic years that smuggling was ceased due to lockdowns. After a lull, when import duties were reduced, the CAD issue has cropped up again and with import duty and other levies on gold at all-time high levels of 18.5%, the ‘propensity to smuggle gold’ would be high, according to the WGC.

The other elephant in the room, export of gold in the form of coins, medallions or as crude jewellery solely for the purpose of importing it back to India, is a fairly recent beast. It came into prominence around 2002 or so. It was mainly fuelled by export incentives on offer then, price and duty arbitrage as well as cheaper export finance. The tool used was LoC (letter of credit) and the vehicles gold, other precious metals as well as precious stones. Even though most of catalysts are no longer on offer, these pseudo exports continue to this day.

However, the trigger point for such exports is not very clear. Whether higher or lower gold price propels it, is still very vague. However, while smuggled gold adds to the gold available for domestic consumption, these pseudo exports reduce the gold available in the domestic markets. Therefore, all these imponderables in the demand-supply equation for gold could cancel each other out and present a ‘balanced trial balance’. Gold’s version of compensatory error.

In such a scenario, how can those in authority take appropriate or relevant decisions on gold? What is the basis of the duty hikes, if the statistical data itself is only partially accurate and the rest an estimate? For, India requires a very deep, mature, transparent and crystal clear gold market. Only then, can IIBX (India International Bullion Exchange) hope to leap frog over the Dubai, Shanghai and even Singapore exchanges and sit across the table with the LBMA on an equal footing.

Finally, what will be main drivers for the gold price in 2023? Jerome Powell’s statement that data on US labour and other drivers of the economy would determine the future hike in interest rates during 2023. The markets took that as a positive and the gold price crossed $1,800 per ounce mark with a view to taking on $1,850 per ounce.

However, Powell’s reiteration that the rates hikes would exceed 2022 hikes to tame the multi-decades high inflation even if the economy faces recession put a spook in the wheels for gold. The yellow metal faces the Powell headwind and the threat of a stronger USD to cap any price rise. However, should the Fed pause in interest rate hikes or if Powell falters, gold has enough ammo to march ahead.

The recent decision by the Bank of Japan to tweak its policy that, in turn, caused the USD to drop and should the ECB as well decide on a policy at variance (due to its own compulsions) to the US Fed, then gold could get a tailwind to launch itself. Then, geopolitical tensions (India-China jostling at Tawang), the threat of global recession emanating from the US and Europe and renewed spread of Covid-19 in China and several other countries could seriously impact global economy and give a serious boost to gold. The continuation of the Ukraine war and its impact on European as well as Russian economy could also provide a pointer to gold. China’s attempt to forge an alliance with Saudi Arabia on the oil price front could put pressure on the USD. Much would depend on the Fed’s resolve to continue on its path of rate hikes in 2023.

Any deviation and gold would be ready in the wings to pounce on the opportunity to score and surge ahead. It could well be a game of brinkmanship!






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