Gold Demand May Rise Soon

Gold has experienced resurgence as a reserve asset – central banks have become net buyers over the past 10 years, and their holdings have reached levels not seen since the 20th century. This has several origins, among them growing geopolitical tension between regional blocs; the swelling share of negative-yielding fixed income securities; and the emergence of possible challenger currencies to ‘king dollar’, which holds a more than 60% share in global foreign exchange holdings.

Currently, all eyes are on headlines about the virus, many central banks may be dovish—which lowers other currencies, even as the U.S. seems to be the most liquid and safest for capital. All this is temporarily leaving gold buyers to seek other trading opportunities for now.

Price losses for the metal had worsened in the wake of data released Monday that U.S. manufacturers grew their businesses in January for the first time in six months. The survey by the Institute for Supply Management rose to 50.9% last month to 47.8%. The moves for bullion come after the most-active April contract saw a weekly climb of 0.6%, and a rise of about 3.8% for the month. The settlement level also marked the highest weekly price finish since March 2013.

Gold futures on Monday posted their first loss in four sessions, with haven demand for the metal taking a hit as U.S. equities partially bounced back from a corona virus-triggered selloff, and the U.S. dollar and government bond yields rose.

However, the spread of corona virus around the world continues to dominate commodity markets. The energy sector remains the focal point of the selling, with crude oil under pressure.

China’s National Health Commission on Sunday said cases of the novel corona virus reached 17,205, while the death toll was more than 360. Cases also have been reported outside the country, with the World Health Organization and Trump administration last week declaring public health emergencies.

Gold continues to shine amid the turmoil. The safe-haven asset has seen strong demand over the past week as investors rotate out of risky asset classes. This has seen the gold price push towards USD1, 600/oz. Dovishness from the US Federal Reserve has helped. Chair Powell said the central bank is carefully monitoring the epidemic and its effects on the US economy.

We expect a lower U.S. dollar over time, and this is one of the major drivers of gold and silver prices. Second, as long as the amount of negative-yielding government bonds is substantial, precious metals and commodities are attractive to invest in (not negative-yielding). Third, major central banks will likely continue to support their economies, and higher official rates are nowhere on the horizon. Fourth, we expect some pick up in jewellery demand from China.

While we expect these events will continue to play a major role in determining precious metals prices in 2020, there are, of course, other variables to consider as well, particularly the underlying fundamentals of supply and demand.

What is more, the recent increase of unrest in the Middle East is slowly building in a premium in precious metals prices, first and foremost supporting gold and silver as a hedge against increases in systemic risks. The political rhetoric is surely heating up in Iran and Iraq following the US attack on a high military Iranian official and, together with the ongoing trade deal saga, these two events could well be the main catalyst for higher precious metals prices in 2020.

Gold has been going strong.  It has always been looked over as a hedge tool. Gold can provide a protection cover against systematic risks, stock market pullbacks, and recessions. It even lowers the risk in a portfolio and efficiently manages diversification.  It further provides liquidity to meet liabilities during times of market stress.

Research shows, an allocation to gold in a typical stock/bond portfolio has provided better returns than those with little or no gold. It also lowers your risk.

Portfolios that include gold have fallen less in bear markets and risen more in bull markets. The long-term value of a portfolio is clearly enhanced by including gold.

And with continued escalation and unrest, demand for gold is expected to rise further as markets will rush towards this safe haven asset which is further expected to push prices high.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.

Pre-Budget Views 2020

There has been a steep decline in jewellery sales over 12 months, and jewellers are facing adverse impacts of the slowdown because of the increase in gold prices, and a slowing of the overall economy.  Moreover gold prices have sky rocketed over the past few months which has further dampened the demand.

At present, gold attracts an import duty of 12.5 percent and a GST of three percent.

This increase in customs duty for cut and polished coloured gemstone is the biggest hit. Additionally, the increase in import duty on gold has had a spill effect and made the grey market stronger. With these duties, it becomes difficult to compete in the world market and export, as China is a major competitor. In fact in the past few years China has overtaken India as the world’s largest consumer of gold.

The volatility in the markets has also pushed gold sales down. Even though safe haven demand is there but in the retail jewellery market, the sales haven’t picked up much.

In the run-up to the Union Budget speech on February 1, 2020, Indian micro, small, and medium enterprises (MSMEs) in the gold jewellery segment are feeling the impact of the decline in jewellery sales. The country saw demand for gold falter in the second half of 2019. Some factors for the decline include a rise in international prices (India imports most of its gold), hike in import duty from 10 percent to 12.5 percent, and liquidity crunch in the Indian economy. And, the Union Budget 2020 could go a long way in alleviating some of these concerns if it focuses on lowering import duty on gold.

Jewellers hope for the volatile market to settle down. They are expecting Union Budget 2020 to come up with good policies to bring stability and better phases in the jewellery industry as there is an immediate requirement to cut down custom duty and import duty charges.

Hoping that this year’s Budget will provide for a reduction in duty on imports of cut and polished diamonds. The gold and jewellery industry is going through one of its toughest phases. However, gold jewellery exports grew 21 percent from November 2018 to November 2019, according to the Gem & Jewellery Export Promotion Council (GJEPC) data.

The Union Budget 2020 is expected to provide for a reduction in the import duty on gold because there is an immediate need for a cut in customs duty.

A possible import duty cut on gold in the upcoming Budget could curb smuggling and boost sagging imports. Commerce Ministry has reportedly asked for a reduction in import duty on gold to boost exports and manufacturing in the gems and jewellery sector. Import duty on gold was increased from 10 to 12.5 percent in the previous Budget.

Despite what the Budget may hold for the segment, volume growth for jewellers is expected to increase on the back of reintroduction of low-cost gold metal loans and likely stabilisation of gold prices at lower levels.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.