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