Gold on a high, poised to go still higher By CHIRAG MEHTA, QUANTUM MUTUAL FUND Gold prices ended at a five-month high, marking the biggest monthly gain since January. With the global economic data deteriorating, markets have started building in more expectations of unconventional monetary measures from various central banks across the globe, given the policy making ideologies prevailing at present. This belief was further substantiated by Bernanke in his speech at the economic symposium at Jackson Hole where he defended his previous attempts of quantitative easing and establishing scope for more in a bid to aid economic recovery. There has been a growing anticipation that slowing growth may spur more action from central banks. Japan’s economy slowed more than expected in the second quarter. The U.S. economic recovery is still fairly opaque. There isn’t much persistence in economic releases. What seem improving in one month drops down in the next. Most of the economic measures from China point to a severe slow down. Also, the policy making rhetoric reiterates the notion that there could be some kind of coordinated action by central banks. Chinese Premier Wen Jiabao said that there’s growing room for monetary policy operation. European Central Bank President Mario Draghi promised last month to do whatever it takes to preserve the euro and the Federal Reserve pledged to ease policy further if necessary. The Fed minutes also hinted at more quantitative easing measures to support the economy. It said “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery”. The thoughts were further affirmed at an annual forum in Jackson Hole, Wyoming, where Bernanke said the central bank “will provide additional policy accommodation as needed” to promote growth. The reaction of the market suggests people expect QE3 (3rd round of Quantitative Easing) may be coming as early as the next meeting of central bank policy makers in September. The Fed chief’s defense of the central banks previous easy money policies was a signal that more similar measures are in the offing. This anticipation is the driving force in the gold markets as of now. Gold demand fell 7.1 per cent in the second quarter as investment slid and Asian jewelry purchases declined amid higher local prices and concern about economic growth. Moreover the weak rupee was also discouraging Indian customers to buy gold. Central bank buying has been a driving force in gold markets acting as a buffer for gold prices. They bought 157.5 tonnes in the quarter, compared with 66.2 tonnes a year earlier. That took first-half additions to 254.2 tonnes. Mine output continues to show marginal increases. It rose 0.4 per cent to 706.4 tonnes in the second quarter from a year earlier. Gold imports by India, the world’s largest bullion buyer, slumped 56 per cent in the second quarter. Overseas purchases plunged to 131 metric tonnes in the three months ended June 30 from 301 tonnes a year earlier. Demand for jewelry dropped 30 percent to 124.8 tonnes, while for coins and bars for investment purpose; slid 51 percent to 56.5 tonnes. But that could only be part of the whole. An article in the Economic Times reported how gold smuggling has boomed again as a consequence of the higher import duties. Cases involving gold seizures at airports have risen ten-fold to some 200 cases worth Rs 9.42 billion in the period between April and June, 2012, up from 20 cases worth Rs 2.43 billion during the same period last year. The entire illegal activity could be much larger which would not be captured in official numbers as seen above. However, below-average monsoon this year has increased concerns about rural jewellery demand, given people’s dependence on farming and the potential impact of a poor harvest on income levels. Rural areas represent about 60 per cent of gold buying in India. Investors are still holding a near-record amount in gold-backed exchange-traded products and central banks are expected to continue their diversification spree. The continuing economic problems around the world have started to rekindle expectations of some easing of policy. With a seasonal likelihood of stronger demand in India and then in China, the second half is going to be stronger than the first half for the gold market. There is too much uncertainty in the global arena which is keeping up the demand for gold. The euro zone has been quiet of late, but that doesn’t mean the problems have disappeared. The European leaders are preparing for a critical month in the three-year-old crisis that will involve the formulation of a European Central Bank bond-buying plan, a progress report by Greece’s international creditors and a looming German court decision on bailout funding. Markets are increasingly awaiting ECB buying periphery sovereign bonds. But it looks like they will defer any announcement until the German Constitutional Court ruling. Also, the expectations relating to more easing measures in China and US may not happen as soon as the markets expects. It is of increasing debate whether the Chinese policymakers will respond to it with more aggressive easing, or would accept a lower growth as they attempt to balance their economy and transform to a more sustained consumption driven one and reducing their reliance on fixed asset investment. If the hopes regarding more stimulus bets are dashed in the near term then there could be some profit booking or selling from speculators driving a correction given that bullish wagers are on the rise. However, that would also provide an opportunity for long term investors to buy the dips given that policymaking have reiterated their ill-conceived notions of debasing their currencies as a means to solve economic malaise and that bodes well for gold. If the stimulus bets are honored then there could be more upsides likely for the yellow metal given what we have seen from the earlier rounds of monetary easing measures. In the light of these macro events, gold appears to remain favourable, as an effective portfolio diversifier.