GOLD AND SILVER SHOW WAVE LIKE MOVEMENTS

Gold looses glitter and silver loses its shine. Precious metals were moving on a see saw all week and then the blood bath of prices had swept the markets. On the exchange gold plummeted to a low of INR 29,100 while silver dropped down to INR 53,100. In the physical market gold and silver were being traded at INR 29,400 and INR 54200 respectively.

Investors, traders and the whole market in general stated different reasons for this crash.

Within a fortnight gold crashed by almost 1000 rupees. But Thursday set a recovery stage for gold. Some weaker U.S. economic data did help to lift gold prices, as the weaker-than-expected Philadelphia Fed business survey worked against notions the Federal Reserve will soon end its major bond-buying program. The other reason that helped gold to bounce back on Thursday from a seven-month intra-day low, was the physical buyers in Asia picked bargains a day after the market was rattled by concerns the U.S. Federal Reserve could scale back its monetary stimulus. This created some positivity in the market.

But before the Fed released its minutes the precious metals markets had already plunged down sharply as rumours swirled that a large commodity hedge fund had been forced to liquidate its holdings, the largest gold-backed exchange-traded fund, New York's SPDR Gold Trust reported its biggest outflow in 18 months on Wednesday, coinciding with the price drop

Gold seemed to know what would come later on Wednesday, as short dated put buying, was followed by a push lower, to trigger a first round of sell stops below the 1600 USD level around midday. Technical inspired selling joined the sell off and as seen from the release of global ETF holding numbers, large long liquidation took place. Around the European lows of 1580 in the afternoon, as so often happens when commodities do a large move, rumours started to make the round that a large commodity fund would be in trouble

A panic selling behaviour was seen in the market.

Spot prices reached a low of $1,554.49 on Wednesday, their weakest since July. They slid 2.6 percent on Wednesday after Federal Reserve minutes suggested the bank may wind down its ultra-loose monetary policy sooner than expected.

It had since reversed course to post a rise of 0.2 percent to $1,565.06 Thursday evening. It fell 2.6 percent on Wednesday, posting the biggest daily drop in a year. 

Quantitative easing tends to support gold, as it keeps interest rates low while stoking fears of inflation. Tumbling prices attracted buying interest in the physical markets overnight in Asia, with analysts and traders reporting high volumes traded on the Shanghai Gold Exchange.

Gold has been caught up in a sandwich between hopes of central bank easing which enhances its inflation-hedge appeal and expected recover of the economy which hollows its safe haven status.

As far as the current outlook is concerned, Gold is expected to move in the range of 28,500. However, one can take a call to buy at this dip as gold is expected to move in the range of 29,500-33,000 rupees in the long run.

PRE-BUDGET VIEWS

1. Government had increased import duty on Gold before the budget. The government's move to hike the customs duty from 4 to 6 percent will have a loud impact on the Bullion sector. The hike sums up to around INR 60,000 (approx) per kilogram of gold. To be clear, with this duty hike a difference of 7 percent between the international and domestic price of the yellow metal is evident. Due to this, the increase in duty on the actual price of gold is being passed on to the retail consumers by the jewelers. This may also lead to rise of illegal channels and malicious activities with respect to importing gold and related products like jewellery etc., in the country. In turn it will lead to an increase in unemployment among the skilled artisans of the country (around 1-2 million families depend on this sector to earn their livelihood) as well the businesses of local jewelers across the country. I expect that this budget will address this issue and a fix duty structure will be levied. The extra revenue generated from the increased duty should be used by the government for creating new hallmarking centers, Research & development in mining sector. 

Hallmarking for jewellery is a great move by the government. It will ensure customer satisfaction by purity assurance. For this, the current need is to increase the hall marking centers at a faster pace so that the implementation is done in no time.

Research & development is the key to the future of Indian bullion industry. 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 1 - 3 tonnes worth of Gold. 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 which have put the industry on a fast track and made it a pillar industry in many of the country's gold producing areas. China's gold output increased 11.66 percent from a year earlier to hit a record high of 403.05 tons in 2012, confirmed by China Gold Association (Source: chinadaily.com.cn). This data showed that it is the largest producer for the sixth straight year. 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.'

I feel FDI is extremely important with regards to Research and Development. R&D is costly but with the help of FDI we can surely work out the way to get the most out of it. FDI will help in strengthening our rupee and in turn reduce the depreciation of our currency.

2. Most importantly, GST implementation is a must. If implemented, it is expected to provide a significant boost to investment and growth of the economy. GST will have a significant impact on almost all aspects of businesses operating in the country, including the supply chain, sourcing and distribution decisions, inventory costs and cash flows, pricing policy, accounting systems and transactions management. A flat 1% across India should be levied by the government, which would replace most indirect taxes currently in place.

3. Commodity exchange have now completed almost 9 years in India. Introduction of Option product for this exchange is must. Those who have the exposure should be given an opportunity. It will be a boon for a bullion trader and jeweler. By using this instrument they can hedge their future position and in a way provide the necessary risk cover. An investor will also be highly benefitted from this instrument. He/she will get a chance to invest in a larger quantity of metal with a lower investment and reap benefits till the expiry date. 

4. I understand that Government is thinking of introducing CTT tax, like the one in the equity market. CTT tax should not be charged on bullion dealers & jewelers, as it will only increase the metal price and in turn increase the price for the customers. It should be charged onto speculators only.

5. Gold Deposit Schemes are offered by banks in which investors deposit gold for a period of certain 3 years earning a fixed rate of interest.  Currently that has been reduced to 6 months. The depository scheme that the banks and MFs are enjoying should also be allowed to corporate, working for bullion industry. It will help to increase the gold reserves and in turn benefit the customers willing to deposit their idle gold. The government should harness the existing reserve of gold in our country rather than turning towards imports and implementing this alarming hike on customs duty. Hiking the duty on imports will in no way, curtail the demand, as the precious metal has always been regarded as one of the best investment options for social security. 

6. Indian households have nearly 25,000 to 30,000 tonnes of Gold. I expect that this budget would show an effective way to gain revenue by exporting it. I would suggest Government of India to introduce schemes like minimum tax scheme 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.

7. I expect an increase in Gold loan scheme period to extend from 180 days to 360 days and LC tenure from 90 to 180 days. As of now Gold Loan is allowed up to 180 days which implies, a jeweler has to rollover his/her position twice in a year and that in turns leads to increase in imports. If the loan period is extended to 360 days, one cycle of loan will be reduced. A direct effect will be reduction in imports.

8. Currently, NRI’s are allowed to bring 1 Kilo of Gold while arriving in India. Earlier this was 10 Kilos. I feel this cap should be raised back to the earlier levels or even more. This too will help in reduction of imports and reduce the Forex pressure.

9. Indian Government does allow export of Gold in form of Jewellery. Export of Gold in form of bars etc should be allowed through banks to avoid money laundering. Moreover the exports should take place at the international market prices only (there is a value addition of 3%+, as per law, which should not levy in this case). Once the exports from India are allowed, there will be a direct effect on Gold price. Over the years, India has purely been an importer. With Exports, I expect the International price would reduce by $100-200 and provide the necessary reduction in India's Current account deficit. On exporting Gold, the refund of Duty should take place in cash or license form.