Gold is a matter of contention for investors—individual, institutional and sovereign alike. Though global prices have been consolidating, in India, gold prices have become sticky at Rs. 30,000 per 10g. At the same time, demand has slowed. In an interview, Marcus Grubb, managing director-investment, World Gold Council (WGC), shared his views on gold prices and demand specifically in India. He also says sovereign demand for gold is an important driver and will remain upbeat. Grubb has been with WGC since 2008 as a strategist responsible for the organization’s view of all aspects of the gold market.
Overall demand for gold has been lower this year. Are prices to be blamed?
If you look at the year-to-date demand in the global market as a whole, the main reason for the slowdown is the Indian market. Not in this quarter, when demand is up, but during the entire year, demand from India is down 22%. The main problem is the rupee’s weakness against the dollar (which has kept prices high).
In the last two months, demand for physical gold and gold investments has picked up in India. So is it that prices don’t matter?
Price does matter in the sense that in the first half of the year, demand was lower; rupee was weaker against the dollar, while the dollar price of gold was consolidating, and the price for Indian consumers was above Rs.30,000 per 10g. This quarter, it has not mattered so much. I think the Indian consumer is getting used to high prices. So while prices didn’t seem to matter in the third quarter, it did impact demand in the first half of the year.
How important is sovereign demand for gold prices?
It is very important. This year central banks bought on dips. This quarter, demand was lower than last year, but it was still an excellent quarter at about 98 tonnes. I think this will continue. Central banks are concerned about the weakness of the dollar as well as their euro-denominated assets because of sovereign debt problems. They are buying more gold to diversify risks.
With money getting allocated to riskier assets, are we likely to see lower demand for gold in future?
I see quite the reverse with quantitative easing in the US and open market transactions being done in Greece and likely to support Spain in the future. There is strife and unrest across European countries reflecting the impact of austerity measures. I think the problems are far from over. In the US, the issue of debt ceiling and fiscal cliff is coming up in December and in the first quarter. Given this backdrop, we believe central bank balance sheets will have to continue expanding to support the economy and that will be very bullish for the gold market.
What is needed to boost gold demand in India?
The factors needed in India are stability in the economy, controlling inflation, stronger currency and more reforms such as foreign direct investment (FDI). I know these things are not directly related to gold. But as such they will increase wealth, which can lead the gold demand back to levels seen last year—of around 1,000 tonnes. The key indicator is also the currency and how it fares against the dollar. We track physical premiums in India on a daily basis and they are back to strong levels showing that demand seems to be picking up.
Are you saying that there is room for both risky assets and gold prices to increase together?
Sometimes investors and others think that it is a zero sum game in case of gold. So if other assets go up, gold should come off and vice-versa. I don’t think it’s quite that simple, especially in India, where you need economic prosperity for gold to do well. Yes, it has safe haven properties, but Indian consumers buy gold even when they are getting wealthier and that’s the key. So if the economy continues to grow through reforms and things like FDI, then it will benefit gold as much as other assets.
Given that gold prices have already risen in the last couple of years, do you expect them to stabilize or will the rally continue?
I think prices are a challenge in the long run for the Indian consumer. In India, if currency stabilizes in the fourth quarter of FY13 but problems in the West and the global financial crises continues, the dollar price of gold will be high. In rupee terms, prices will still be high. We don’t have a price target ourselves but if quantitative easing continues, then gold prices will tend to move higher.