Bullion Bulletin Research
Gold, the most debated asset class in last decade, is at centre of discussion once again. This time, the debate is more on if gold would hit new high this year as well or it would correct more, say towards, $1100/oz by year’s end. Protagonists who think gold price would correct are betting heavily on Eurozone issue – the bailout issue of many Eurozone nations would create more uncertainty in the region’s investment as ‘solvency fear’ of many Eurozone banks are looming large. On the other hand, protagonists who believe gold would rally again this year, are maintaining whole lots of arguments ranging from poor employment situation, weak monetary policy, need for creation of new financial package in form of QE, so on and so forth in advanced economies led by United States. Some are eying closely on Chinese data as they believe China is consuming more gold than what they are reporting and so demand will continue to remain high even at this so called high price. It is very difficult to address exactly the event of future as so much ‘ifs and buts’ may ultimately culminate into ‘confusion’. For coming three to four months, what we can make a study on price trend of gold in world’s largest gold consuming nation, India, as well as global price trend last decade between June and October to ascertain what investors can get if they decide to invest in month of June or July.
Typically, peak season in India starts after June and remains till October / November. We have taken this time period as demography of India is somewhat different from rest of the world, when it comes to the question of gold consumption pattern. Analysts around the world love to analyse things on quarterly basis. But it may deliver wrong signal in the Indian context because of various festivals and marriage, demand kicks in during this time frame (July-October).
Price Trend in Mumbai Spot Gold
Fig 1 is a historical analysis on return or loss on investment in gold if made in month of June. We have taken monthly closing price of Mumbai gold. It shows gold has delivered negative return only four times if bought in month of June. The maximum loss that an investor incurred was 2.50%. On the other side, the return ranges from 3.19% to 21.14%. Altogether, the average return was around 6%. This return is fairly phenomenal. Of course in India very few people buy gold to get short term returns other than few traders who speculate on gold contracts in commodity exchanges. People buy gold for long term horizon as a future store of value for the purposes we already mentioned. In last ten years average annual return on Rupee denominated gold is over 10%. So, why not buy gold in June?
Compared with Sensex (Fig.2), the story is more revealing. Between 2003 and 2007, the average return on Sensex is 21% in the current time frame. But when it is calculated from 2000, the return works out to less than 4%. It is because, in few years like 2000-2001 and again in 2008, the equity market nosedived and massive erosion of wealth had taken place. So, there is a high risk when investing in paper assets like equities and in current economic atmosphere, a tangible asset or ‘hard money’ like gold is more than handy from investment point of view and of course, Indians should not mind.


Last year, rupee has played most important part to push gold price in India. From investors’ point of view, it was a windfall profit as total return on investment came around 21% in the current time frame. This is certainly not desirable from economic point of view. The currency depreciation along with high import bill on gold have already created massive discomfort to government. We should look at it in later paragraphs.
Price Trend in London Market:-


Fig.3 exemplifies London gold market the same way as we have seen in Fig.1. We have taken monthly London PM Fix price denominated in US dollar. Price trend in London market in the current time frame is equally encouraging. The eroding value of dollar against other currencies arising out of massive economic slowdown in US has created gold investors’ choice last twelve years. Gold has emerged as ‘hard money’ against ‘fiat money’. Investors in west are not inclined to jewellery purchase and consequently, gold ‘s demand as investment asset has increased. Between 2000 and 2011, gold has delivered negative returns only three times between June and October. The average return on gold is calculated around 4.15% in twelve years while Dow Jones has delivered mere 0.17% (Fig.4). The maximum return was in 2007 and 2011 with 20.41% and 13.35% (Refer Fig.3). Last year, consumers from major European countries bought over 350 tonnes of gold primarily for investment and most of this purchase took place from June to November. This purchase was nervous reaction against depleting Eurozone economy.
Things have not changed too much. The underlying fear of erosion of ‘public wealth’ is pressurizing the economic world. What has changed the health of world’s second largest reserve currency, the Euro? It is this fear that the demand of dollar from European investors has increased which put pressure on gold since December last year. A recent study shows dollar’s reserve ratio has increased over a percent last six months. But it does not mean that US economy is doing well and so investors are returning to dollar leaving gold behind. It is just little structural adjustments taking place in currency front which on the other hand has kept gold in a range.
Will this year will be equally good for investment in June:-
This is little tricky question for investors in India. As we earlier indicated, government of India is really concerned about high current account deficits. They can’t do anything in case of crude oil (which attracts highest import bill), edible oils and pulses etc. As gold is not a part of essential commodity, government really wants to decrease the import bill on gold and silver. There is not enough proof how much Indian demand is responsible for price determination in the international market. Other than this following factors will have major role to play in coming four months:-

• • Indian rupee is the most underperformed currency against US dollar in Asia this year. But, as crude oil prices have come down, there may be some respite on demand of dollar in coming months. Gold import has also come down last two months, according to industry sources and stock market is performing relatively good. So, one can expect some improvement in forex front which have strong impact in precious metals prices. (Of course at present there is no sign of improvement).

• In global market, central banks and ETFs are major buyers of gold last three months. Central bank purchase has no impact on price determination. ETFs are buying only at lower level in the current price range of $1530-1640. So gold is not getting enough strength beyond $1640/oz. European investors are currently on the sideline owing to solvency issue of European banks. This is a technical part of whole drama – structural advantage of buying gold at the time of economic slowdown is still very much upright.

Conclusion
People’s thirst for gold can not be stopped at least in India whatever the situation comes. What can be looking into alternate source of gold so as to minimize the pressure on import bill? Alternate source of gold can be unearthed with co-operation and deliberation between the industry and government. After all, India’s large jewellery community wants the ‘real metal’. From investment point of view, there is no issue why investors will not buy gold in June. As we already mentioned, the negative return is just 2.5% till October in last twelve years.

Source : Bullion Bulletin