Bullion Bulletin Research
For bullion investors in West, 2012 appeared to be a bad year. The return on bullion on full year basis is lesser than 4%. This is the worst performance since the beginning of bull market. For India, though, the return is robust. Both gold and silver have delivered around 12-13% return on full year basis. This can be attributed to huge rupee depreciation against dollar. But, compared with equity, bullion has underperformed on a big margin. CNX Nifty has gained an whopping 28% in 2012 and even in rest of world the performance has been relatively good, barring a few. So, the question inevitably arises, is the bull-run over in bullion? It cannot be answered in haste. There are countless pressure points in developed economies which need to be addressed by central banks and of course the political body of respective countries or region. What is clear at present that there will be concern on capital adequacy in leading banks both in Europe and US, Federal Reserve’s final decision to stop creating fiat money, ECB’s capability in handling debt situation in struggling countries, Japan’s plight to revive growth as they have decided to depreciate their currency against US dollar which many experts believe the final effort to save the economy that has been struggling over 24 years – to name only a few. There is also a fact that central banks have sold 3,000 tons of gold in last 11 years, out of which Switzerland alone sold 1500 tons. Of course, there are a few countries that have increased their gold reserves in the same time. So, central banks’ buying of gold would be looked into closely in coming days.
To start with, let’s have a quick look on Europe. European Central Bank has been trying hard to avoid Greece like situation elsewhere in the region. There is genuine concern of sovereign debt in countries like Spain, Italy, and France. Bonds of these countries are over-valued and there is great difficulty to maintain the capital adequacy set by Basel Committee on the issue of ‘capital adequacy’. Euro zone’s banks are already under-capitalized and it would be great challenge for ECB or other member countries like Germany, the Netherlands to save the falling economy. Some experts are even arguing that region’s banking system is already bankrupt in real terms. So, what we have seen during Greece saga in the middle of 2011 that both gold and US dollar rallied in tandem may be replicated again this year, if European situation revives.
‘Quantitative Easing’ (QE) has been a most popular term in financial blogs during last five years. The Federal Reserve has used QE to buy mortgage backed securities, US Treasury Securities, US agencies debt and Treasury Inflation Protected Securities. This process of printing money has largely facilitated gold price move since the end of 2008.
During the time when the Fed’s QE1 buying was underway, from late November 2008 to March 2010, gold (LBMA PM Fix) powered 43.38% higher! This is a heck of a run, and largely contributed to Fed’s debt monetization.
QE2, which was smaller but hard-core since it focused purely on monetizing US’s Treasuries, saw gold gaining 11.89% during its lifespan. This is certainly an excellent gain over less than a year.
Then came “Operation Twist” that claimed to use current money (selling short terms securities) instead of issuing new that is $400 billion to buy longer term bonds. Over the entire Twist timeframe with no new monetization, gold drifted sideways to lower.
Since gold rallied strongly during both QE1 and QE2, there was no reason for the market not to expect it to respond similarly from an open-ended QE3 measure. That is not the case this time. From 13 September 2012 till the announcement of next QE measure, there was a decline of 1.34% in the global gold price. In continuation QE4 has also seen a downturn movement of 3.42% till date.
In a conclusive statement, we can sum up with the fact that QE has been a massive boon for gold in first two occasions. When the Fed floods markets with cheap money, gold’s appeal as a store of wealth and an inflation hedge is burnished. There is an approximate 113% improvement in the precious metal price since end of 2008 largely on the account of rapid debt monetization and ultra low interest rate. But, market is now immune to this Fed’s stimulus and looking for other catalysts for a great hike ahead, perhaps. Ben Bernanke announced on 3rd January that Fed will end its debt buying programme by end of 2013 and at the same time looking at unemployment rate to come down below 6.5%. Creating jobs to that scale is certainly the biggest challenge in hand for the Obama administration at least this year. In recent time, private job numbers are encouraging, but will it sustain or improve in coming quarters?
Another challenge that the economists are arguing that Fed may have to take is raising the interest rate much earlier than the proposed. Till date, there is no much concern of inflation, but continuous money printing will trigger the same at some point of time. On the other hand, the ‘fiscal cliff’ has well handled as many economists feared that it would create recession in the short term. So, there is not much trigger which may excite investors, can be expected in the near term.
Japan’s stock market rallied 23% last year, the best ever performance since 2005. It is wonderful news for investors after years of depression in economy. Japan’s new government wants to deflate the value of Yen against US dollar and flood the economy with huge stimulus. Yen, indeed, has depreciated to two year low against US dollar. The government believes that this will boost the country’s export. The new Prime Minister Shinzo Abe has reported to have decided to exert pressure on Japan’s central bank to get the stimulus going. The old Yen carry trade route would be opened up once again. But, at the same time, it has to be seen how investors would respond, as at present Japan’s debt to GDP ratio is near 200%. So, there is considerable risk in investing in Japan’s market. Gold can be benefitted out of this arrangement as investors, if they decide to go aggressive in Japan, would certainly seek some protection and bullion is the right option.
India and China
India and China are traditional buyers of gold. Both the countries have been facing high inflation and low growth. Still, the demand for the metal is relatively strong. In fact, India will be benefitted doubly if the price of gold comes down. First, Government of India will smile a bit as Current Account Deficit is the biggest concern for them. July-September CAD has touched 5.4% of GDP. On the hindsight, RBI has been contemplating to mobilize local gold, i.e. gold lies idle in Indian household, into jewellery and financial market (read it as financialization of bullion) so that India needs to import less gold than what it is importing now. Various industry bodies have submitted their suggestions towards this goal. (Primarily, the Committee of India Intl Gold Convention has facilitated industry representations to various bodies including DGFT, Revenue dept, RBI & FMC.) Secondly, buyers will be happy as they have to pay less for the metal than what they are paying now. High depreciation of rupee has caused gold and silver highly expensive. Rupee may continue to remain weaker against dollar at least for next three quarters and so, India will continue to pay high price for gold even if gold comes down a bit in international market.
Financial market may remain volatile at times once again this year as we have witnessed last year. After good performance of equity last year around the globe, investors will be happy to invest in equities this year as well. Economic decision by various countries, what we have discussed above, will keep the investors tentative all the time, though. On structural point, gold and silver are certainly showing some exhaustion between $1600-1700/oz and $35/oz level. So, this range will continue to remain strong hurdle this year. At the same time, it would be no surprise if prices would come down around $1450-1400/oz. In India, Rs.27500-27000 will be an attractive range for buying the metal. If you are fortunate, my dear friends don’t lose the opportunity to buy.
Source : Bullion Bulletin