Gold market update and Outlook
3rd March, 2010
Chirag Mehta - Fund Manager (Commodities)
Gold prices were highly volatile during the month of February but managed to close on a positive note. London AM Fix gold prices denominated in dollars registered an increase of 2.75% after heavy declines in the previous two months. A cocktail of factors including dollar appreciation, issues surrounding sovereign debt in the Euro Zone, IMF gold sales etc influenced gold prices.
In the Indian Markets, gold prices inched closer to the Rs. 17,000 per 10 grams mark. Prices in rupee terms increased by 3.02% in the month of February. Appreciation of rupee by 0.30% did limit the upside. Finance Minister, in the budget announcements, increased the customs duty on Gold to Rs. 300 per 10 grams from Rs. 200 earlier. Customs duty being a “pass-through” led to an immediate increase in prices in the local markets, commodity bourses and the prices of gold ETFs listed on stock exchanges.
With the backdrop of sovereign debt issues, the markets seemed to be over-reactive to most of the news flows. The peculiar characteristic being an initial knee-jerk reaction causing a sell off followed by a more of a rational approach that brought back demand for the yellow metal.
Gold started the month with a relief rally after two consecutive months of decline. But, dollar’s rally against the euro on concern widening budget deficits will stifle Europe’s economic recovery led to a huge sell-off in the gold markets. The euro slumped on concern that Greece, Spain and Portugal will have difficulty curbing budget deficits and investors feared a Greek default could spark a wider European debt crisis. Soon, gold recovered on strong buying emerging at lower levels and as investors assessed that even the dollar without the support of sound monetary and fiscal policies, is a depreciating asset. The U.S. government’s spending spree has pushed the nation’s marketable debt to an unprecedented $7.27 trillion.
Even, the IMF “on market” gold sale announcement was received negatively as the markets perceived as more supply dumped on the gold markets. The psychological effect of mobilization of IMF gold weighed on the gold price. But, it was soon realised that the investment demand for the metal is still robust and it was increasingly felt that Central Banks of China, India or Russia may purchase it before it being sold on market.
The third instance of over reaction was when the Fed announced an increase of 25 basis points in the discount rate for the first time in more than three years. Initially, this was regarded as a step towards withdrawing from the unprecedented measures it used to halt the financial crisis lifting the dollar higher and gold lower. Soon, people realised that this isn’t tightening. Raising the discount rate isn’t going to have an effect on the American household and do not signal any change in the outlook for the economy or for monetary policy.
As seen above, knee jerk reactions only caused short term gyrations in gold prices causing increased volatility. At the end of the day, sanctity prevailed and it is hard to see how gold will not remain in strong demand with the increasing lack of faith in fiat currencies.
A report from VM Group revealed that Global gold hedges, or sales of future production, fell the most in almost two years in the fourth quarter. The worldwide hedge book dropped 4 million ounces from the prior three months to 7.9 million ounces, the biggest quarterly decline since 2008’s first quarter. Producers de-hedged 8 million ounces last year. Gold producers sometimes sell future output at fixed prices to secure loans. They can reduce hedges by buying back contracts, adding to demand.
“De-hedging is likely to continue, but volumes will be slow” this year, “We expect full-year de- hedging in 2010 to be between 1.5 million ounces and 3 million ounces” the researcher said.
Also, World Gold Council released their fourth quarter report during the month. Key highlights of the report are as follows:
Demand Side:
• Gold demand added 2.6 percent in the fourth quarter from the previous three months as investment and jewellery consumption climbed amid record prices. Although, demand was 24 percent lower than a year earlier, when investors bought gold as a refuge from the global economic crisis.
• Investment demand increased 2 percent from the third quarter to 219.5 tons. North American and western European retail investment jumped 77 percent.
• Jewellery demand added 2.5 percent from the third quarter to 500.4 tons, and was down 8.5 percent from a year earlier.
• Electronics usage, the biggest industrial use for gold, was up 4.5 percent at 68 tons from the previous quarter and 25 percent higher than a year earlier.
• China’s jewellery demand gained 6.2 percent in 2009 to 347.1 tons, making it the only country where jewellery consumption expanded. That narrowed the gap with India, the biggest buyer, to 58.7 tons, from 174.9 tons in 2008.
Supply side:
• Mine production slipped 3.4 percent to 657 tons from the third quarter.
• Scrap supplies advanced 43 percent to 370 tons from the third quarter. Still, that’s 37 percent less than in the first quarter and little changed from a year earlier.
Overall, Investment demand remains highly robust. Investment flows have continued at a time even when global economy has shown some signs of recovery and strong asset markets. This suggests that flows have not just been on account of safe haven demand but more from diversification needs. Gold is seen as an “insurance policy” on rising concerns about “currency devaluation” and “inflation”.
Gold is the only real currency and it seems to be in a process of re-establishing itself as a monetary unit. Given the debt loads created by the policymakers across the globe is and will continue to destroy the purchasing power of paper money. Fiat currencies continue to lose credibility. Even if Greece gets rescued, there will be another country in line with their hands out. People are flocking to gold to shield themselves from the volatility in the currency markets.Gold seems to be the only sensible thing to possess and an allocation to gold becomes utmost important and necessary.
The internal supply and demand dynamics also support the case for a tactical allocation to gold. The diversification benefits of gold provide a compelling case for longer-term investors.
Disclaimer:
The views expressed herein are the personal views of the Fund Manager. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The Sponsor, The Investment Manager, The Trustee or any of their respective directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. None of The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material.
Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956.
Mutual Funds investments are subject to market risks. Please read the Scheme Information Document / Key Information Memorandum / Statement of Additional Information / Addenda carefully before investing. Scheme Information Documents /Key Information Memorandums/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com