Carat & Stick

Aah… the lure of gold! From kings to commoners, from ancient to modern times, gold has seduced us all, its glitter unfading, its power undiminishing throughout human history. Tales of our gold frenzy are unrelenting, and this seems to be still the case now as the world is perceived to be in the grip of yet another great global gold rush. But these are difficult times in a world forced indoors by a mystery virus. Aside some dings and dents, with the global economy in a tight squeeze, the lust for gold hasn’t diminished though.

For one, the high price of gold is unnerving . Prashant Jadhav, 30, a Mumbai-based professional, deferred his wedding by a few months to next year. Neither he nor his spouse can afford the ornaments for the occasion. A homemaker in Ranchi, Radha Munda, isn’t able to muster courage to buy a gold chain for the coming festive season.

Even the brave are cautious. Like Srinagar-based Nasreen, who plans to marry in April 2021. “I bought less than what I wanted to, but then the quantity was more than what my in-l­aws got for me,” she explains. Amit Mehra, the MD of Delhi-based jewellery outlet Mehrasons (Yashpal Mehra Group), says the few customers either exchange old gold for new, or buy lighter (more wearable) pieces.

Some are smart; they save to buy in the future. Kalpana Prashanth, who owns a jewellery store in Chennai, claims that only those who were able to deposit regular amounts in her firm’s monthly scheme can buy gold now. Some aren’t as slick. Like Sana, a government employee whose father is in hospitality. “My father suffered losses due to the crisis. So, I took a Rs 2,000,000 loan. For a woman, gold is the most imp­ortant purchase for her wedding,” she explains.

Most of the people are desperate, thanks to job losses and salary cuts due to COVID-19. They use the high price as an opportunity to sell or mortgage gold. The salary of Balkar Singh, a Gurgaon-based merchandiser for a garments factory, is cut by half. He sells 30 gm of his mother’s gold. “This was one of her last pieces. But I had no options given the regular expenses on rent and children’s education,” he laments. He decides against a mortgage as it adds an additional burden.

Clearly, there is no dash for the glitter of the yellow metal—at least, not yet. Between January and June this year, jewellery demand in the country slumped by an unprecedented 74 per cent, says the World Gold Council (WGC). Even if the Indian consumer appetite picks up during the forthcoming festive and marriage season, the annual sales in 2020 may be 25-40 per cent less than the previous year. There is, therefore, no crying reason for the price to go up; it needs to dip.

For the record, India and China are the major bullion buyers. In 2019, India accounted for 16 per cent, or a sixth, of the world gold demand. WGC claims that Indians hoard $1.5 trillion worth of gold. Each household owns an average of one kg. This scenario is both perplexing and intriguing. For it defies economic logic. Despite a slump in retail dem­and in India, why is the price high? Are global sales, speculation, sentiment, and so-called technicalities responsible for the current gold surge?

What, then, is the truth behind claims that gold gave the best return this year, compared to other investments and saving options such as shares and debt. In India, as on September 21, the Sensex was below its yearly high. Mutual funds stayed shattered. The bond market was miserable. And returns from the most att­ractive interest option, provident fund, threatened to go below the inf­lation rate.

In comparison, gold zoomed by more than 30 per cent. Globally too, says a recent WGC report (August 6, 2020), gold was up 30 per cent by the end of July, which bettered performance of the US S&P 500 stock index. Nasdaq, which comprises American technology stocks, recorded an impressive 20 per cent gain, but was lower than bullion. The US Treasury bills, considered the safest investment, were in a downward spiral. As the rep­ort claims, “US 10-year yield finished at an all-time low of 0.53 per cent.”

However, there is another way to look at the same data. Why not compare the lows of the stock indices with their current levels? After all, they were battered in March this year, but recovered remarkably over the next six months. Seen from this perspective, between their lowest level in March and September 20, the S&P 500 zoomed by 48 per cent, and Nasdaq by an unbelievable 85 per cent. The Sensex jumped by 40 per cent. Investors could have gained more from stocks than gold.

In the case of gold, demand in conjunction with supply determines its price. At the global level, between January and June this year, purchases were down 6 per cent. There were tectonic shifts within categories—gold bought for retail consumption, and investment purposes. The former constitutes jewellery that commoners buy. The latter includes paper gold in the form of ETFs (Exchange Traded Funds), bars and coins, and acquisitions by central banks.

In the first six months of this year, the global jewellery segment crashed by 46 per cent, compared to the same period in 2019. The same was true for investment sub-categories like central banks, which reduced their buying by 39 per cent in the January-June period, or “6 per cent below the 10-year H-1 (first half of the year) average”. Gold bars and coins recorded a 17 per cent fall. These broad trends continued in July and August.

There was only one sub-category, Gold ETFs, which rebelled against these trends. Compared to the first six months of 2019, the inflows in these products trebled during the same per­iod this year. In July, says the WGC, they “recorded their eighth consecutive month of positive flows”. Between January and July, the total purchases stood at 900 tons, which was “considerably higher than the previous annual highs”, i.e. more than the past highest amount bought during an entire year.

India witnessed similar activity. Between January and August this year, Rs 5,500 crore flooded into Gold ETFs, which are mutual funds backed by physical gold. Every issuer has to buy bullion to back the paper. “As people could not buy physical gold, ETFs became the natural avenue for investors,” says Vishal Jain, Head (ETF), Nippon India. Gaurav Rastogi, Founder-CEO, Kuvera.in, explains that people buy the asset class that did well in the recent past, and queued up for Gold ETFs.

ETFs made up for the shortfalls in other segments. Still, the combined buying spree was lower than what was witnessed in 2019. Given that most economies were locked down for several months, gold production fell. In some nat­ions, it was the decimated. Between April and June this year, mining in Mexico and South Africa was down by 62 per cent and 59 per cent, respectively. Coincidentally, the overall decline in gold supply in the first six months exactly matched the dip in demand—an estimated 6 per cent.

As per economic theory, there was no demand-supply mismatch and, hence, the price should have remained the same. There was no reason for it to zip up. This is where the technicalities kicked in. Consider the impact of currency devaluations. The dollar, the strongest currency, weakened due to global economic paralysis, stimulus by global central banks of $19 trillion, which was more than three times the figure during the Financial Crisis of 2008, and crashing interest rates.

Jateen Trivedi, Senior Research Analyst, LKP Securities, points out that the Dollar Index slipped from $104 to $93 within a few months. This nudged investors, especially the large institutional ones, towards bullion, or rather paper gold, for the ‘3S’ reasons—safety, speculation, and sentiments. In spot and futures markets, the prices went up, and each hike fuelled the next in random and regular patterns. New ETFs were issued at higher prices, which imp­lied that the physical gold they had was worth more.

In India, the process was aided by rupee devaluation. “The correlation between the exchange rate and local price is high at 0.84. This is because the Indian price takes into account the exchange rate,” says Praveen Singh of Sharekhan. If gold is $100 a gm internationally, the Indian price is Rs 7,000 at 70:1 rupee-dollar exchange rate. If the latter becomes Rs 75, the price goes up to Rs 7,500. Since January 2020, the rupee dropped by 9 per cent against the dollar, before it recovered a bit.

The ‘3S’ gush is aided and abetted by the stimulus packages. They enable flows to large institutions, which plough them into stocks and bullion, the first for profits and the second for security in case of volatility. “A part of the liq­uidity by governments and central banks may have perhaps moved into gold,” says a cautious Ashish Ranawade, who heads wealth management at Emkay Global Financial Services. Stimulus has other repercussions, which energises the demand for gold.

More money pumped into the system through stimulus leads to chances of higher inflation, which forces large buyers to buy gold as a hedge against overall increase in prices. Indian wholesale and retail inflation rates perked up in the past few months. Stimulus further debases top currencies, and reduces their value against gold. Money can be printed at will, and gold cannot. So, in times when the paper currency floods the market, gold becomes dearer.

All these factors need to be seen in the light of interest rates. The central banks slashed lending rates to revive comatose economies. Top-notch developed nations such as Japan, Switzerland and Denmark have negative rates. There are 22 countries, where it is zero, and another 23, including the US and the UK, where it is below 1 per cent. Against a backdrop of a possible, or actual, rise in inflation, this implies that returns from fixed-inc­ome bonds, securities, and fixed dep­osits will be negative. So, where does one park the money? Fixed-incomes are out. So are most commodities. The exposure to stocks needs to be monitored due to their tum­ultuous ups and downs. “There is an incentive to chase gold,” says Ranade. “Low interest means low opportunity cost to hold gold, as the investor does not lose other attractive investment options,” adds Singh. For large risk-averse institutions like global pension funds, the Hobson choice is between gold and gold.

Obviously, the institutional activity excited the investors, who opted for paper gold. They too decided to join the bandwagon. Although overall demand and supply stayed balanced, there was a perception of hectic buying, which influenced the spot and forward prices that in turn imp­acted the two again and again. In a regular motion, each round broadened the diameter of the circle, and the price went up and up, although not as dramatically as stocks did since their lows in March 2020.

It is time now to ask the bullion-dollar question. When will this stop, or will the circular cycle continue for the next 1-2 years? In other words, what is the price peak for gold this time? The story becomes fascinating as some pessimists claim that it will stabilise around Rs 40,000-45,000 per 10 gm. Others are highly bullish, and their estimates range from Rs 65,000 to even Rs 100,000. This brings us to the more quintessential question: should you buy, postpone, hold or sell gold? At the end of the day, it will boil down to retail demand, consumption rather than investment. For example, if the Indian jewellery purchases do not gather pace during the festive and marriage season, gold’s glitter may fade away. This will further depend on the immediate economic scenario. “If the situation normalises, the price may correct to a lower level, or stabilise at the current ones (of just over Rs 50,000),” says Colin Shah, chairman, Gems and Jewellery Promotion Council.

Both the conditions are dependent on each other. A faster economic recovery may spur retail demand for gold. However, it will radically impede the eag­erness among ETFs for the yellow metal. Normalisation will witness a realignment of asset portfolios as inflationary pressure ease, currencies recover, and interest rate reg­imes become steady. The trade-off is between the buying of gold jewellery by individuals, and by ETF investors, which are largely institutional.

One needs to understand that there may be a lag between the two. If gold consumption picks up, it will happen slowly. People will tend to be cagey and apprehensive, and focus on immediate needs. The emotion is rightly echoed by the Ranchi-based Rita Kashyap, a housewife, “My brother-in-law’s marriage, which was scheduled in April 2020, was postponed. We bought some ornaments, but did not purchase more as prices went up. We will make do with whatever we have.”

Festivals, occasions, and marriages may become sober, smaller, and simple. They may turn out to be low-key aff­airs, and the Big Fat Indian Weddings may take a back seat. “Although it is seen as an investment, for Indians, gold is lifestyle expenditure. If life itself begins to revolve around essential items and needs, it will hit gold purchases,” exp­lains Prashanth. It is not the price, but the post-COVID-19 mindset that may prove to be crucial. One cannot shrug the baggage quickly.

However, if gold consumption and economies get back on track, even if slowly, the pace to junk the Gold ETFs will be faster. Contrary to expectations, the owners of paper gold are as finicky, or possibly more, as the holders of shares and mutual funds. There is as much volatility in gold ownership through ETFs, as is the case with stocks. Experiences prove this quite conclusively. Time and again, over the past 12 years, ETFs bought and dumped gold like rusted iron. In the aftermath of the global financial crisis of 2008, which was the last economic upheaval, purchases in 2009 and 2010 shot up. And then there was a lull for the next two years. In 2013, ETFs were net sellers of more than 500 tonnes of gold in the first half. In H-1 2016, they witnessed a huge inflow that was followed by minimal activities in 2018 and 2019.

The first three months of 2020 saw decent action in ETFs, and the pace picked up between April and June. In July, it was better with purchases of 166 tonnes. The figure came down in August to a mere 39 tonnes. Some experts feel that this was prompted by a correction, as gold price slipped. But the September figures may be higher as the price went up again. However, on September 20, it was still lower than the earlier high of Rs 55,000.

Will the current correction in price be followed by a new high, or a new low? Is this setback the first in a long series of similar events that consistently break a continuous bull run in gold? Rest assured that like the initial upward upsurge was inexplicable and incongruous, and the correction unexpected, the same will be true about gold’s future. In short, should you seek your fortune or run away from it. In the epic movie, Mackenna’s Gold, both the twists happened.

By Yagnesh Kansara and Himali Patel with inputs from G.C. Shekhar (Chennai), Naseer Ganai (Srinagar), Navin Mishra (Ranchi), Anagh Pal (Calcutta) and Lola Nayar, Jyotika Sood, Vishav, and Rajat Mishra (Delhi).