No
doubt this had to be the blog for the week. Precious metal prices have been
rocketing down for the entire week.
Let’s
first focus on the reasons for the price fall:
1. FED’s QE3 is being unwound at a
steady pace. Tracking the improving US economic conditions, FED might even
increase the pace of tapering. QE was
responsible to set record highs for gold and the same is the reason for its
downfall in 2013.
2. Ukraine turmoil had given the
much necessary support to safe haven buying assets like Gold where the prices
were on an upward spiral. As the turmoil continues to unwind itself and most of
the news being discounted by the market participants, the support is slowly
fading away.
3. Physical demand is a concern.
Bloomberg had reported that Iraq had increased their Gold reserves by a massive
36 tons in March and IMF data showed that Turkey was back increasing their Gold
reserves by 9.3 tons in February. Hong Kong Trade Statistics showed a strong
month of Chinese Gold imports for February, which were a net of 109.2 tons,
which was 30% more than January and 80% more than the previous year. When I had
seen these stats, I did feel that the physical demand is holding strong to
support the Gold price fall. But frankly, Turkey or Iraq aren’t the main
supporters for Gold. Undoubtedly it has been the show of Asian countries and
majorly China. Now to track Chinese physical demand, I take support of SGE
premiums. When the prices fall, SGE premium is the first one to go up, while
that has not been the case lately. SGE premiums have been locked in a negative
territory or hardly minutely up despite Gold price fall from $1390 to $1290 in
a span of 2 weeks or so. Due to this I feel that once March data is released,
it is likely to show a decline in imports relative to February numbers as SGE
premiums were in positive range for most of the time in Feb. With SGE premiums mostly in negative to
hardly anything, it would have been less attractive to import metal. Even the
But as the economic uncertainties increasingly looming over Chinese banking
sector through shadow banking issues, I feel their physical purchases would
dampen a bit.
4. On the domestic front, Gold and
Silver prices are dropping faster than its dollar denominated counterparts.
Rupee has appreciated considerably when compared to dollar over the past few
weeks. This has led to downfall in gold prices. Indian government and RBI had
to take tough decisions over the past year and now the results are paying off.
With the CAD in control, Indian economy is looking to improve from here on. Due
to which investors are regaining their faith in India and investments are
gradually increasing.
5. Silver prices are more or less
dragged along with Gold prices. With regards to platinum, the AMCU does not
seem to be willing to accept less than double salaries, as it announced it
would give Platinum producers one year extra time to adjust the wages and would
only then return to work
My
take on Gold prices in dollar terms will be in the range of
$1180-$1400 i.e. INR 26500 to INR 32500. I feel this is the range that the
investor should keep in mind while buying Gold.
My
take on Silver prices in dollar terms will be in the range of
$18.50-$23.50 i.e. INR 41000 to INR 47000. I feel this is the range that
the investor should keep in mind while buying Silver.
Like
others I do feel that if overall the economy improves than the downward journey
for precious metals will continue. But like others, I feel the below given
reasons will always play a crucial role in providing returns to the investors
who trust on Gold and other precious metals.
1. With the upcoming elections in
India and CAD in control, I do expect that the new government will surely take
some steps to boost the R&D for mining Gold in India as well as provide
some relaxations in Gold import policies. If that happens, Asian demand will
get a boost from India. But government policies will play a key role as they
know the best when it is about deciding the best for Indian economy.
2. As the prices head lower, I am
sure that the physical demand will improve drastically world over and not only
China because everyone knows that Gold is the only asset that can be taken into
account during any economic turmoil.
3. Gold will always play an
important role in geopolitical conflict situations and economic uncertainties.
4. As the prices continue to
spiral down, mining industry will face hurdles to operate in low margin or no
margin environments. If that is taken into consideration, I feel that their
operational costs will rise more than the income they generate from mining
creating the necessary closure of mines as it will be difficult to stay in
business in such conditions.
5. Silver and Platinum continue
their downfall as they are more or less dragged along with gold prices. But as
the economy improves their use in industries across the world will continue to
rise and in turn increase their demand and prices.
6. The bubbles created by money
printing and market manipulation - not just in the U.S., but the entire world has
never been universally unbacked, nor government intervention so widespread.
This has not been seen over the years and the stimulus programmes have led to
gigantic balance sheets of central of banks of the world under the word:
“Economic Development”
Gold
has always stood by one and all when it comes to economic uncertainties. But
with Central banks and governments trying their best to revive their economies,
Gold is loosing its investment appeal to some extent, as investors look for
short term benefits.
I feel
buying physical Gold, Silver and Platinum should be on cost averaging basis. It
has been a successful strategy since the bull year began, though it would be a
bit strange for the investors who started investing in the last couple of
years. I am sure Gold or for that matter
any precious metal investments would always give best returns if considered as
long term investment options and something that you can bank on in financial
instabilities.
The primary purpose of this blog (Prithviraj Kothari's view on Bullion Markets- MD,RSBL (Riddisiddhi Bullions Ltd.)) is to educate the masses of the current happenings in the Bullion world.
- Previous blog - "GOLD GOES ON A BUMPY RIDE"
http://riddisiddhibullionsltd.blogspot.in/2014/03/gold-goes-on-bumpy-ride.html
http://riddisiddhibullionsltd.blogspot.in/2014/03/gold-goes-on-bumpy-ride.html
