Gold - one of the few true repositories of value

Gold as a medium of exchange and a driver of value has been used since time immemorial. Given the ‘loose’ monetary policies of the West – read indiscriminate printing of money, QE etc. it becomes even more essential to keep an eye on the yellow metal; since, in the crazy race of currency devaluation (Japan) and the printing of dollars and euros to keep the US and EU economies (like Greece, Portugal etc.) afloat, the only true store of value remains in a metal still rare enough to continue holding value.

The world is still engulfed in easy monetary policy encouraging high risk appetite driving fund flows into risk assets creating mispricing in certain asset markets. Despite that, it’s commendable to see gold in a positive territory even in the light of the recent bearish rhetoric surrounding gold.

After the big sell off in gold last year, it’s price has been consolidating in a range with pivots at around the $1300 an ounce levels (around Rs. 28,000 – 29,000 for 10gms in Indian terms). A mix of opposing factors seems to be resulting in a range bound market. Demand from physical / bargain buyers is serving as a strong floor and geopolitical tensions in Ukraine and around the Middle East have helped gold stage a comeback. Whereas, the Fed tapering coupled with the advancement of expectations on rate increases have been a worry for gold markets.

Tapering to a larger extent already seems to be priced in. As far as the rate increases are concerned, the markets have been running ahead of expectations. Rate increases by the Fed would require a really strong economy or high inflation. The economic data remains a mixed bag at best and no clear sign of a sustainable high growth with labour market glut showing no signs of abating. If the Fed were to increase interest rates on inflation fears, this in itself would be positive for gold. Also, in contradiction to common belief, interest rates need to rise much higher before they become really attractive to investors and distract money from gold.

Equities, especially the U.S markets, appear expensive to many investors and therefore makes them ripe for a correction. A set of strong economic numbers may be enough to force the US Central Bank to turn more hawkish acting as a trigger for correction. However, markets can remain irrational for longer than we anticipate which could pose as a risk in the short term. If the Fed fails to sound hawkish, then the combination of stronger growth and the build-up of liquidity over the years could spark inflationary fears. Either of the factors could drive investors to gold. However, investors seem to be waiting for a clearer, firmer sign that gold prices have, in fact, bottomed out.

If it were not for geopolitical worries, gold probably would have been lower then what it is currently trading at. The risks inherent in the international political log-jam appear only partly figured into a risk premium in gold with the longer term implications of these hostilities still don’t seem fully factored in. The reality is that there has been a major reduction in inter-governmental cooperation. This will propel more investors to seek gold as a portfolio diversifier over the next several years than otherwise would be the case.

We still continue to see the world remain awash in easy money and an unconventional and aggressively loose monetary setting; this remains bullish for gold over the long term. Although, near term challenges remain as we see the U.S taper play its course. Also, all the easy money infused by central bankers across the globe makes its way to risk assets especially equities that continue to get more expensive by the day. However, sooner or later, we could see the economy showing visible signs of distress as a result of lower money on the table caused by further tapering causing a strain on asset markets. Military conflicts, especially in the Middle East, unfortunately show no signs of abating. With the Gaza conflict in the limelight, the pseudo war in Iraq and Syria has largely gone ‘unnoticed’. Tensions could likely rise as that area remains the powder keg of the world which could go up anytime. Closer to home, Pakistan too is seeing protest marches in its main cities with the army called upon to maintain security, much to the chagrin of other political parties and demonstrators who have, so far, been peaceful.

The threat of armed conflict or coups leads a lot of investors to put their money in Gold. Given the unfortunate state of the Middle East, and the Russian intrusion in Ukraine - could potentially escalate leading to a jump in gold prices.

In my view until then, gold prices would likely consolidate further and trade sideways in the near future. Given the policy mindset, it would not be surprising to see further unconventional policy response on any signs of unsettling of asset markets; this may act as a likely trigger for gold prices to move upwards. Even further easing policies in the Euro zone, Japan or China may help to re- iterate gold’s role in today’s fiat-currency driven monetary setting. I believe that Gold prices may likely gain significantly in the long-term due to the expansionary monetary policies of the major central banks and currency debasement.

In the Indian markets, along with the international gold prices, the rupee rate and government taxes also play an important role in determining gold prices. Rupee has largely been trading in the 60-62 range and appears to be closer to fair valuation. As far as the levies are concerned, markets were hoping for some relaxation in the budget which did not materialize nor seems likely in the near future. With the pickup in demand as the festive and marriage season approaches, there can be some premium that gets built into the price as imports remain constrained. Gold prices in Indian market will continue to be largely influenced by the international gold prices.

This article was published in Business Standard.

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