Gold Weighed Down By Market Forces

Factors ranging from rampaging inflation, the Ukraine war, to the US dollar and fears of an approaching recession will determine gold’s future, forecasts bullion analyst Sanjiv Arole.

‘Down periscope!’ is often the clarion call given by the captain of a submarine to dive into the deep blue sea after a typical shoot-and-scoot operation. For, submarines are generally used in marine warfare, apart from research of the oceans. Gold got its own ‘Down periscope’ order when Jerome Powell, the US Fed Chief, in his focused pursuit of taming the raging US inflation at a 40-year high of over 9.1%, embarked on hiking interest rates by over 3-3.5% in 2022-2023. His announcement of a 75 basis points hike in US interest rates in May saw gold nose dive to $1,678 per ounce on 15th July, 2022 (intraday low in New York). However, after the US Fed announced a 75 basis points hike in interest rate on 27th July 2022, signaling a slightly less hawkish outlook, gold, that had already rebounded from its lows of around $1,680 per ounce, immediately jumped by over $22 per ounce, it closed that day at $1,714 per ounce, ( London pm fix).

Now, submarines normally resurface for recharging, communication and exchange of goods. However, nuclear submarines can remain under water for a very long period of time, theoretically even for decades. But, gold, staring at the bottom of the barrel, seemingly at the mercy of the Fed, appears to have a long wait to again touch the levels seen in the first quarter of the year. Gold is always referred to as a hedge against inflation, but the aggressive stance of the Fed on interest rate hikes and the resultant strength of the US dollar has poured cold water over gold’s burning ambition of scaling all-time high levels above $2,000-2,200 per ounce fuelled by the Ukraine war and the high US inflation. Not only that, the runaway oil prices just after the war began, the removal of Russian gold refineries by the LBMA from its good delivery bars list, and the banning of gold and diamond exports from Russia by the G-7 group of countries further skewed the gold markets.

Matters were further compounded in the Indian context. The mounting current account deficit (CAD) issue elicited a classic knee-jerk from the authorities as import duty on gold was increased by 5% just as the first half of the calendar year 2022 ended on 30th June 2022. As if that was not enough, gold, silver, diamonds, etc. were put in the restrictive list. Although its immediate impact could take a while, the market is already anticipating rise in unofficial goods entering the gold markets across India.

Looking at the gold price scenario, on the face of it, gold averaged $1,871 per ounce for the Q2 2022, up by around 4% over the 2021 average price of $1,798.61 per ounce and around 3% higher than the average price in Q2 2021. However, there was much upheaval in the gold price, particularly in the last couple of months. In fact, after the yellow metal spectacularly rose to a high of $2,077 per ounce on 9th March, 2022 (intraday) in the aftermath of the Ukraine war, it fell sharply by nearly 24% to around $1,678 per ounce in mid-July (intraday) as the US Fed embarked on a regime of high interest rates during the year.

In fact, the gold price fell by around 9% over the May end price of $1,838 per ounce to its lowest level for the year so far of $1,678 per ounce in mid-July. The announcement of a 0.75% increase in interest rate after the 27th July Federal Open Market Committee (FOMC) meeting saw gold becoming volatile in a $1,714-$1,769 per ounce range. Whether gold continues its forward march would depend on the next FOMC meeting in September. Whether the Fed succeeds in taming inflation or is forced to soften its stance of two further rate hikes in the remainder of the year remains to be seen.

While the strong US labour market is a negative for gold, the looming recession and decline in GDP numbers could impact the USD and subsequently only be beneficial for the yellow metal. Gold has received a reprieve for the moment and much will depend on the course of the Ukraine war, inflation concerns, and the US dollar and most importantly fears of the impending recession to determine the future of gold in the coming days.

Elsewhere, the Gold Demand Trends Q2 2022 was released by the World Gold Council (WGC) on 27th July, 2022. The salient features of the GDT were: total gold demand 8% lower to 948 tonnes than during the same period last year; average gold price in Q2 2022, at $1,871 per ounce, was 3% above the Q2 2021, hidden was a 6% decline in the gold price towards the end of Q2; there was an outflow of 39 tonnes in gold ETFs during Q2 2022. However, net inflows in gold FTFs were 234 tonnes in H1 2022 as compared to 127 tonnes in H1 2021; bar and investments were unchanged at 245 tonnes in Q2 2022. The sharp fall in Chinese bar investment demand was offset by demand in India, Turkey and the Middle-East. But, there was a total decline of 12% to 526 tonnes (year-on-year) due to Chinese weakness; while Q2 jewellery demand was 4% higher, the total jewellery demand fell by 2% in H1 2022. The Chinese zero-Covid19 policy mainly contributed to the overall fall in demand for gold; recycling was 8% higher mainly fuelled by the high gold price in the Q1 of 2022; Central banks continued to buy gold in Q2 2022, official gold reserves grew by 180 tonnes in Q2 2022. Total net purchases were 270 tonnes H1 2022.

In the Indian context, India’s Q2 gold demand rose by 43% to 170.7 tonnes. This was mainly fuelled by Akashay Tritya demand and a very low base in Q2 2021. The lower gold price too saw 49 tonnes of imports in June 2022. However, total import of gold in H1 2022 was just 335 tonnes as compared to 493 tonnes in H1 2021. Imports for Q2 2022 were up by 34% to 170 tonnes as compared to 131.6 tonnes Q2 2021. Investment demand was up 20% at 30.4 tonnes in Q2 2022 as compared to Q1 2021. Gold jewellery was up by 49% to 140.3 tonnes in Q2 2022. Total jewellery demand was up by 6% 234 y-o-y. Then, recycling of gold was up by 18% to 23.3 tonnes over the Q1 2021 level.

Meanwhile, the Border Security Force (BSF) seized a record 41.49 kg of gold valued at Rs.21.22 crores at Benepol, along the Indo-Bangladesh border around 21-22 July. The smugglers escaped from the boat carrying the contraband. This said to be the biggest haul of gold on the Bangladesh border. Whether this implies that the recent 5% hike in import duty on gold gave a further impetus to gold smuggling, or if it was just normal routine smuggling carried out as the margin smuggling was already very high even before the 5% hike last month, the 7.5% import duty plus 2.5% agri cess and 0.75% social welfare surcharge plus the 3% GST always gave great scope for unofficial trade to flourish. The latest import duty hike was more like icing on that cake.

That coupled with the recent notification by the Central Board of Indirect Taxes & Customs that put gold, silver, stones and jewellery under the Controlled Delivery List alongside drugs, antiques and cigarettes, have complicated matters for the gold and jewellery markets. This implies that the above can be imported-exported only with knowledge and supervision of a proper officer, even allowing for tracking of suspicious consignments. While those in the know in the industry brush this aside as only some procedural matter, there is still a gnawing feeling that this could prospectively be another hurdle to be ‘managed’ by the industry.

The international bullion exchange (IIBX) was inaugurated by the Honourable PM on 29th July 2022 at the GIFT City. India is poised for a leap forward towards becoming a mature gold market. However, with rampant smuggling and controlled delivery (at least on paper) of goods, can gold imports be freely imported through the IIBX?

Finally, the bottom-line in Fed chief’s views on the Fed’s stance in the remainder of the year is that henceforth its outlook would now be neutral. It implies that no longer would the Fed be immune to the state of the US economy vis-à-vis the rampaging inflation, declining GDP, recession, state of Ukraine war, et al. In effect, the fed was virtually abandoning its hawkish large hikes in interest rate in the remainder of the year as well as 2023. As a result, one could see only a 25-50 basis points hike in September and December of 2022. The Fed would hold back on aggressive rate hikes so as to prevent the economy from slowing down into a recession very soon.

The 0.9% decline in US GDP growth in the last quarter marks the second successive quarter that the US economy has contracted causing many to believe that recession has already set in. Jerome Powell disagrees with this prognosis and feels he has some more leeway to tame US inflation.

Buoyed by the Fed’s neutral stance in the near future, gold embarked on its mission to regain the $1,800 per ounce levels before beginning its assault on the $1,900 per ounce plus levels and beyond. The yellow metal scaled $1,769 per ounce during Friday’s trade mid-afternoon, before closing at $1,753.4 per ounce ( London pm fix on 29th July 2022). It finally closed in New York at $1,766-67 per ounce.

The yellow metal first needs to reach its periscope level of over $1,800 per ounce before resurfacing to recharge its batteries to make contact with $1,900 per ounce plus levels. Only then can it think of yet another assault on the $2,000-2,200 per ounce region. It would be akin to driving in a blizzard and rain with slick tyres instead of wet-weather ones and the Fed looming large in the rear-view mirror.

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