Gold Remains Golden Even Now: Volatility Fails To Dampen The Glitter

Introduction: During last 12 months of period, bullion prices have been inching up steadily and gold threatens to outperform equity as an asset class. Gold price is up by almost 10 percent in last one year. Much higher than the returns offered by equity benchmark - BSE Sensex for similar period which is down by almost 8 percent. With heightened volatility in the international financial markets, gold is back in fashion as one the most preferred asset classes as indicated by increased cash allocation to the gold ETFs globally. According to World Gold Council in Q1 of 2016, gold backed ETFs have seen their strongest inflows since the 2008-2009 financial crisis.

Gold demand can be classified as: - 

•       Demand for jewellery

•       Technology

•       Investment in gold in the form of bar and coins and ETFs and similar products

•       Central banks and other institutions purchase of gold

Five years’ average data pegs India’s gold demand at 229.5 tonnes per year just lower than 245 tonnes demanded per year by China on an average for five years. The gold demand of India in tonnage is way ahead of the US, Europe and Middle East whose 5 years’ average gold demand is recorded at 46 tonnes, 84 tonnes and 79 tonnes respectively. Put together India and China constitute to close to 50 percent of world gold demand. Growth in consumer demand for gold was highest in India and USA for Q4 FY15 at 6 per cent, followed by China where the consumer demand grew by 3 percent, according to the data published by World Gold Council. Jewellery plays an important role when identifying demand for gold.  Gold jewellery accounted for almost 50 percent of the world gold demand over the past few years, on average. India and China still remain the two largest markets for gold jewellery. Gold demand has been on rise recently also due to several central banks bolstering their gold reserves significantly in the second half of FY 2015. Another interesting usage of gold is in advanced technology. Gold's unique properties keeps gold in demand for new uses in medicine, engineering and environment management.

India Gold Imports: -

Post GOI intention of bring the gold imports down there has been a visible downward trend in the gold imports. However, gold imports picked up in the year 2015 at 947 tonnes.

Relationship with the US Dollar: - Gold has also seen a surge due to low dollar prices. If the dollar price is low, then dollar price related products becomes cheaper. Therefore, it increases the demand of such precious metals. Also if the dollar price falls, international investors prefer to invest in safe heavens which are yellow metals. In India, gold prices per 10 gram comes to around Rs 30,000, depending upon the dollar fluctuation. It is calculated by multiplying one ounce (i.e. $1280) with the dollar (i.e. Rs 66.50) which if divided by 1 ounce (1 ounce = 31.1 grams) will give 1 gram cost to India. If this 1 gram is multiplied by 10, it will give the value of 10 grams plus 10 per cent import duty added will give the cost of 10 grams’ gold which comes to around Rs 30,000.

Interest rate change and Gold prices: -: Generally, gold prices have an inverse relationship with the interest rate. As the interest rate increases, prices of gold as a commodity go down. Over the years, Fed had adopted negative interest rate policy which had benefitted the gold prices. Whenever interest rates rise retail investors start investing in the US related financial products such as bonds and commercial papers as they will earn a higher rate to the investment made. When there is a negative interest rate such a financial product is not attractive, which again boosts the investment in gold. With the recent rate hike by Fed, gold prices could not see a much impact due to volatile global market. Here the trigger was the downfall of global markets which created a panic like situation and the prices of gold gained. Recent Fed review on interest rate, where the Fed kept the interest rate unchanged has come as the booster to gold. If Fed would have hiked the rates, it could have impacted the gold prices. With the inflation up, employment stats are weak and it does not look like Fed may increase the rates. Therefore, there is every chance that the gold and silver will rally in the months to come.

Relationship with Indian Markets: - The Indian stock markets also react inversely to gold prices in international markets. In a simple sense, whenever the markets fall, gold gains as people prefer and diverse their investments into safer instruments which is gold. Also the period of January to March were majorly volatile, there wore incidents such of crude prices falling, Japan adopting negative interest rate, China growth slowing down. Therefore, due to such external economic pressures, people invest in gold, which are the safer bets, and therefore such actions ultimately raise its prices as supply surges. Also during the volatile markets conditions, investors generally use gold to mitigate the risk. Recently in the month of January to March when the global markets plunged, due to falling crude oil prices, gold prices started picking up. During the first week of May, prices of both gold and silver are at their year high. Gold prices are trading at Rs 30,020 on per 10 grams

Conclusion: -

Taking cues from the surge in global gold demand and lacklustre performance of equity asset class globally there is a good probability that the gold prices may inch up. The negative interest rate environment in most of Europe, Japan and to an extent in the USA has not been able to spur growth in global economy. Due to lack of economic growth the stocks markets in various regions including emerging economies are suffering negative returns. Recent announcements made by Bank of Japan to not cut interest rates further surprised global markets and led to Japanese Yen strengthening and the US Dollar weakening.  This weakening of dollar has led to the recent rally in gold prices.  Indian economy even though touted to be the fastest growing economy globally is facing slowness in growth as reflected by recent Nikkei’s India Manufacturing and Services PMI Index data.  The Nikkei’s China Services PMI also reflected moderation in growth. Concerns of China slowdown and expected increase in volatility in equity markets augurs well for gold prices. With negative rate in major economies being the new normal and hinting at no growth to low growth environment investors’ confidence in equity asset class is challenged. The abundant liquidity in global financial system aided by high income levels may find gold as an interesting avenue.