PRECIOUS METALS REACTIONS POST FOMC MEET

The positive Greek Election results did give a boost to the equities market but there were mixed reactions from precious metals. Mainly because the entire market is waiting for the outcome from the Fed’s FOMC meeting.

The results of the Greek elections, in which the pro bailout party had won, didn’t seem to impress forex and commodities traders. All eyes in Europe continue to stare at Spain & Italy. In yesterday’s G20 meeting the leaders talked about the EU debt crisis and Spain’s soaring borrowing costs.

The G-20 meeting, held at Mexico continued for two days- 19^th and 20^th June. At the conclusion of the summit, leaders announced a U$430b firewall to give some stability to an increasingly unsettled global market. Safe-haven bids boosted gold as G20 leaders pressed Europe to do whatever it takes to combat Europe's crisis after a victory for pro-bailout parties in a Greek vote reduced the chances of a euro breakup but failed to calm financial market

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, started its two-day policy meeting - there were growing expectations that it will look to ease policy further to stimulate economic growth in the country. Many expected the Fed to extend its long-term bond buying program through Operation Twist beyond its current June deadline – the result being a weaker USD. ‘Operation Twist' programme implies funding the purchase of long-term debt by selling short-term notes - which is set to expire at the end of this month.

Fortunately these anticipations proved true. In a bid to reduce unemployment and protect the expansion, Fed has decided to extend Operation Twist till the year end with a sum of U$267, but no announcements regarding QE3 plan have been made.

Immediately after the meeting, Gold saw a range of Rs. 30,075 to Rs. 30,155. Gold is now expected to move within 1580$- 1640$ and any movement beyond this range will bring about great volatility. Though gold reduced in dollar terms, rates in Indian market remained more or less the same because rupee appreciated against the dollar to a tune above 56.20. Ratings agency Fitch, meanwhile, lowered its outlook on India to negative from stable.

Moreover, demand remains soft in India due to the lack of auspicious buying periods over the next few months. For June, the Bombay Bullion Associations expects gold imports to fall to 20-25 tonnes from 55-60 tonne in the same month of last year due to high gold prices in the rupee.

The government has not intervened much to contain the rupee appreciation. Hence gold is expected to lie at these levels.

PROMOTE GOLD EXPORTS RATHER THAN WORRY ABOUT IMPORTS

Gold is always considered as a safe haven. Surrounding the current macro factors like Indian currency depreciation, Euro zone's debt problems, China’s economic slowdown & weak economic indicators from USA, Indian Gold prices are touching new highs to offset the risks in the world economies.

Government of India has introduced various measures to curb the imports of Gold.

Government’s point on Gold imports:
India imports most of its gold requirement. As per Government of India, Gold as an investment has 2 issues. The investment is non-productive as gold is hardly used in industrial production and it has contributed to the high current account deficit of the country.  Moreover, the foreign exchange reserve that is used to import gold reduces the availability of this resource to finance the import of other commodities.

Our point of view through which we can have a win-win situation:


Gold is always considered as a safe haven asset or to be precise a perfect hedge against any economic turmoil. Investing i.e. saving in gold is preservation and even addition of individual’s wealth. Savings is a way by which you expect returns over a later stage in life or during some emergency. So, calling gold investment a non productive one is not correct when we are talking about a shield for Indian people who are running the economy.


Research & development is the key to the future of Indian bullion industry. India holds around 9% of the global gold reserves estimated at 14,000 tonnes but fails to generate wealth out of it due to weak investment in exploration and mining activities. India is rich in mines but the R&D is so poor that we are hardly in position to extract much of its abundant resources.

To be precise the country produced and refined only a minuscule 2.46 tonne worth Rs312 crore in 2008-09, the latest period for which data are available. That’s less than 1% of the value of metallic mineral production in the country. 


On the other hand, China boosted its gold refining business after it gave companies a single-window clearance along with fiscal and infrastructure incentives. Today, the country produces and refines about 320 tonne (approx.) of gold annually, the most in the world.

I feel that if R&D is carried in an efficient way, production of the metal will increase. This will reduce dependency on imports and in turn help the government to increase the forex reserve.


 As the metal will be extracted locally, customers will be benefitted pricewise, due to local production. As we know, India is one of the leading consumers of gold and could challenge the likes of China and South Africa in gold production provided the right policy decisions and enabling environment for gold exploration and mining is put in place.


Indian households have nearly 25,000 to 30,000 tonnes of Gold. Government should show an effective way to gain revenue by exporting it. Schemes like minimum tax scheme should be introduced wherein an investor is charged minimum tax to convert his/her unaccounted gold into an accounted one. By this the government treasury will also increase and the idle gold can be put to use. 

The other scheme can be a VDS scheme (voluntary disclosure scheme) by which the Gold /Silver can be brought to the market.

Government should promote Bullion export to take place in the country as it does for the jewellery. When Bullion is exported, an extra 1.5% value charge is levied by the government on the exporters. Moreover to redeem Duty, the exporters have to pay around a percent to the banks. If a provision is created in this case, then we could see an increase in Forex reserves by the exports.


India believes in Gold investment and measures to promote such savings need to be issued by the government rather than curbing them. from Mr. Mukesh Kothari's excerpt

GOLD- UPS AND DOWNS

Last fortnight saw great volatility in gold, with gold reaching its life time high at Rs. 30,400 per 10gm in the physical market, then dropping again by almost 1000 rupees per 10 gm and then nearing back to its life time high.


Indian gold prices in the bullion market reached of Rs. 30,285 per 10 grams on Wednesday. On Wednesday, Indian gold prices rose by Rs. 270 to Rs. 30,285 per 10 grams and neared its previous record of Rs. 30,400 set on June 6. This is mainly due to Rupee weakness against dollar amid strong cues from the world markets. Gold rose on Wednesday morning trading, reflecting a slight softening of the US dollar and continued fears over the stability of the European periphery.


A rally on Tuesday afternoon pushed the metal through $1,600 to a high of $1,617.85. It was last near this level at $1,613.25/1,613.75 per ounce, up $2.53 on Tuesday's close.


Gold has outperformed other precious metals, leading to renewed speculation that it had regained its status as a safe-haven asset - its traditional role in times of economic uncertainty.


With China's economy slowing in addition to the euro zone's debt problems, the USA payrolls data added to worries of a global economic slowdown. The May employment report was quite weak, and it does raise the odds of Federal Reserve to launch another round of monetary stimulus to support the U.S. economy, known as "Operation Twist," at the its next policy meeting on June 19-20. The Twist program extends the maturity of the central bank's Treasuries holdings in a bid to bring down long-term borrowing costs like mortgage rates. The program is set to expire at the end of June.


On Domestic front, India is reeling under the pressure of depreciating currency i.e. Indian Rupee. A currency’s external value declines when their import weighs more than its general exports because it expands the trade gap and increases pressure on the economy as a whole. In the case of India, nearly 70 percent of its oil demand is met by imports. As a result, the plummeting currency will eventually increase import bill and will lead to a rise in oil prices and contribute to inflation. This in turn will lead to a rise in precious metals.


The Greek elections that were held on Sunday were expected to bring in more volatility, but then again the market is awaiting the FOMC meeting that concludes on 20th June.


Gold has an opportunity to re-establish its safe-haven status, particularly as concerns over sovereign debt, flat currency, counter-party risk and the desire to hold a hard asset have supported gold in the past.

GOLD CREST- INVESTORS ABANDONING THE YELLOW METAL

Gold has always enjoyed an edge over other metals in terms of its value and prestige, being the best investment option. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises. The sudden surge in gold prices tends to create a standstill in the bullion market.

Last fortnight saw great volatility in gold, with gold reaching its life time high at Rs. 30,400 per 10gm in the physical market, then dropping again by almost 1000 rupees per 10 gm and then nearing back to its life time high.

As on Thursday, Indian gold prices in the bullion market created a new high of Rs. 30,450 per 10 grams.

With China's economy slowing in addition to the euro zone's debt problems, the USA payrolls data added to worries of a global economic slowdown. The May employment report was quite weak, and it does raise the odds of Federal Reserve to launch another round of monetary stimulus to support the U.S. economy, known as "Operation Twist," at the its next policy meeting on June 19-20. The Twist program extends the maturity of the central bank's Treasuries holdings in a bid to bring down long-term borrowing costs like mortgage rates. The program is set to expire at the end of June.

On Domestic front, India is reeling under the pressure of depreciating currency i.e. Indian Rupee. A currency’s external value declines when their import weighs more than its general exports because it expands the trade gap and increases pressure on the economy as a whole. In the case of India, nearly 70 percent of its oil demand is met by imports. As a result, the plummeting currency will eventually increase import bill and will lead to a rise in oil prices and contribute to inflation. Absence of Government decisions on various policy matters is creating a vacuum in India’s economic growth.

Such factors are paving way for new highs in Gold prices, as it is considered as a safe haven.

This uncertainty in price leaves the short term investors with a risk during making their investment decisions. As the market does its daily job of balancing fear and greed, it becomes increasingly apparent that fear predominates. Investors are abandoning anything with the slightest hint of risk.

On the other hand, an investor would buy the yellow metal at any point, if he/she has a futuristic goal. As also a domestic need for jewelery would trigger the purchase. Jewellers would in turn buy only during dips, preparing for the upcoming festive season. Thus bullion houses would witness lesser demand owing to the plummeting price of gold.