BackIn India, it’s too early to write off gold, say analysts
Analysts say India’s appetite for the precious metal will eventually prove to be immune to price movements
Premium(Priyanka Parashar/Mint)
Mumbai: A sharp drop in gold prices triggered by speculation that Cyprus plans to sell its reserves of the metal to tide over its financial crisis may continue in the short term, but does not signal a permanent change in the story of the yellow metal in Asia’s third largest economy, analysts said. India’s appetite for the precious metal will eventually prove to be immune to price movements, they said.
From an investment perspective too, it’s too early to write off gold as a safe haven, despite the crash in prices, they said.
The drop is primarily a panic reaction of investors, both in international and domestic markets, which might extend by another 10% in the short term, after which prices will consolidate, they said. Prices have dropped by about 12% in the local market in the past week.
If the 13.9 tonnes sale takes place, this will arguably be the largest such disposal by a euro zone central bank since France sold 17.4 tonnes in the first half of 2009.
A mix of global and domestic factors—recovery in the US economy, the continuation of quantitative easing by the US Federal Reserve and the movement of rupee in India—will play a decisive role on gold prices in India, experts said.
Most experts, while agreeing that price correction will continue for some more time, said strong fundamentals of gold as an investment commodity and its reputation as a safe asset in an uncertain global environment and volatile inflation scenario will aid its recovery in the medium term from multi-year lows.
“Gold prices have only gone up in the last 12 years and the law of gravity will inevitably catch up with anything that grows at that pace," said T. Gnanasekar, director of Mumbai-based commodity and forex research firm Commtrendz Research and Fund Management.
“Gold has already tested the current low levels. What was expected to happen in a few months happened in a few hours. The fall will continue for some more time, but as soon as investors realize the facts, the commodity will bounce back," Gnanasekar said.
The metal’s bull run as a safe bet for investors began at the start of the last decade. From 2001, international gold prices rose at a compounded annual growth rate of 14.2% from $272.5 per ounce (28.35g) to $1,394.09.
The trend continued through the 2008 global financial crisis that followed the collapse of US investment bank Lehman Brothers, when investors exited dollar-denominated assets and turned to gold to safeguard their positions. Since September 2008, gold prices rose 13.29% before peaking in September 2011 at $1,900.23 per ounce. Since then, it has lost 17.6%.
“Much will depend on how the US economy performs and dollar movement," said Madan Sabnavis, chief economist at rating agency Credit Analysis and Research Ltd.
“At the current stage, there is a lot of uncertainty surrounding gold and it is difficult to predict its course in the near term. While there will be some more correction in the short-term, the commodity will bounce back in the medium to long term and remain as a safe asset to the world economy," Sabnavis said.
Jewellery demand rise
Unlike other countries, Indian obsession with gold has more to do with traditional linkages. According to World Gold Council, nearly 50% of the gold bought in India is in the form of jewellery for the purpose of weddings and there’s a legacy aspect to the metal as well.
“The fall in gold price will only add to the demand for jewellery, at least by 8-10%," said Rajeev Sheth, chairman and managing director at Tara Jewels Ltd, a listed entity. “There has been a substantial surge in the enquiries made for ornaments in the last few days. In India, the customer is not worried about the price movements. It has more value than a mere investment product."
The sharp fall in gold prices could result in inventory losses for gold jewellery retailers and exporters, a research report by rating agency Crisil Ltd said on Tuesday. It could lead to a fall in players’ operating margins by 1-2 percentage points in the current fiscal, it added.
According to Crisil, the nearly 12% drop in the past one week is expected to cause significant inventory losses and impact margins of gold jewellery retailers and exporters. But jewellery retailers said they won’t suffer losses as they have hedged their gold inventory.
In recent years, gold’s popularity as an investment has surged and constitutes a significant portion of overall demand, experts said. Typically, investors buy gold bars from large bullion dealers, while coins are sold through commercial banks and jewellers. Such buying has declined due to the crash in prices, industry officials said.
There has been a 20% rise in demand for gold ornaments in recent past, said P.P. Jose, executive director at Joyalukkas, a Kerala-based jewellery chain with 85 outlets around the world. He attributed the surge in demand to the advent of the wedding season, besides the fall in prices.
The price drop has, however, hampered demand for investment-related buying, Jose said.
Shares of leading jewellers rose on Tuesday, after falling five consecutive days. On the other hand, stocks of gold loan non-banking finance companies (NBFCs) such as Muthoot Finance Ltd and Manappuram Finance Ltd continued to drop. Analysts attributed this to the negative investor outlook on these firms.
Since Friday, Titan Industries Ltd has lost 3.57%, Tribhovandas Bhimji Zaveri Ltd 1.28%, PC Jeweller Ltd 6.56%, Tara Jewels 1.25%, Thangamayil Jewellery Ltd 9.5% and Gitanjali Gems Ltd 0.18%. Sentiment changed on Tuesday and Titan gained 2.45%, Tribhovandas 0.89%, PC Jeweller 0.64%, Tara Jewels 0.18% and Gitanjali 0.72%. Thangamayil Jewellery, however, continued with its losing streak.
Muthoot and Manappuram fell on Tuesday as well. Since Friday, these two stocks have lost 23.41% and 20.51%, respectively.
New borrowers will have to pledge more gold for loans, but the bigger risk for gold NBFCs is the erosion in the value of the metal they hold. In case of defaults, they may not be able to recover money through auctions, said Hemanshu Kuriyal, research analyst at Mumbai-based brokerage firm MSFL.
Silver lining
The decline, if sustained, will ease India’s burgeoning current account deficit (CAD).
In the 12 months ended December 2012, total gold demand in India was 864.2 tonnes, down 12% from 986.3 tonnes a year ago, according to the World Gold Council. In value terms, demand declined 5% to $46.5 billion.
“The current drop in gold prices, if it leads to a decline in the import of physical gold, can ease the burden on the economy from a widening CAD," said D.K. Joshi, chief economist at Crisil.
Alternative financial instruments introduced to curb the import of physical gold such as gold exchange-traded funds (ETFs) have not been successful. As of March, the total investment in such instruments was ₹ 11,648 crore, according to the Association of Mutual Funds in India.
Net inflows to the instruments nearly halved in fiscal 2013. Inflows to gold ETFs slowed to ₹ 1,414 crore in the year ended March from a five-year high of ₹ 3,646 crore in the preceding fiscal.
Both the Reserve Bank of India (RBI) and the Congress-led United Progressive Alliance have been making efforts to encourage investments in alternative financial instruments. Recently, a committee headed by K.U.B. Rao, an adviser to RBI’s department of economic and policy research, recommended the introduction of products such as a gold accumulation plan, gold-linked accounts, modified gold deposits and gold pension products, among others. RBI is examining these proposals.
Ruchira Singh contributed to this story.
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