GOLD ENTERS A BEAR PHASE
November 2013 saw the culmination of two different bull runs – the first, a 24-year career that aggregated almost 16,000 Test runs and 100 international centuries, and the second a 12-yearplus bull run that saw the gold price move from around $250 per oun
In recent times, as performance levels dipped sharply, since their respective peaks in 2011, the writing was already on the wall. Finally, Sachin Tendulkar gracefully retired from all forms of cricket on November 16 and got a Bharat Ratna for his accomplishments. The end of gold’s fantastic 12-year-old rise could be traced with the decline in the average gold price by almost 36% during the year (till November 26) from an average of $1,668.98 per ounce in 2012 to roughly around $1,225 per ounce. While it can be safely said that gold’s bull run is over, is gold now already in a bear market? Consider the following: (a) Not only did the average dollar gold price decline by around 36%, but the range during the year was over 42%. The price volatility meant that investors shied away from gold. The liquidation in gold ETFs saw huge quantities of gold (more than 10 times the normal 85 tonnes per month) being exported from the UK to Switzerland for refining into bars for the Asian markets. This put additional pressure on the gold price. (b) The average dollar gold price fell every month during the first half of 2013. After a slight recovery in August and September, the average gold price declined in the last two months again. It reached its lowest for the year at $1,259 per ounce in November (till 26th). This sustained fall in the dollar gold price impacted demand for gold in most countries. In India, the depreciating rupee further accentuated the decline thereby impacting demand for the yellow metal. However, China saw a different scenario as the demand for gold jewellery increased due to the stronger local currency against the US dollar. (c) Gold scaled its high for the year at $1,693 per ounce in January itself. Thereafter, the gold price has declined in each subsequent month except in August and September. It would seem that after every decline in the gold price, the peak levels in subsequent months have declined with only slight or temporary deviation from this trend. Even the lows for the year show a similar trend with every decline being lower than the previous one till June. After a brief detour from the normal between July and September, the same trend has been seen in the last two months. The price fluctuations resulted in lower demand for investment gold. With expectations of lower dollar gold price disinvestment in Western investment gold was evident. All the above indicated an end of the gold bull run and the emergence of a bear market for the yellow metal. Gold prices declined over the last two years due to a variety of factors. Prominent among these were the following: (i) the slow economic recovery in both the USA and the Eurozone. Economic growth slowly translates into better stock market performance and there is less need for stimulus and gold loses its status as a safe haven, (ii) the slowdown in growth rates in emerging markets like India, China, etc. therefore, putting more pressure on the gold price; (iii) lowering geo-political tensions worldwide, with scaling down of conflicts in Syria and some resolution to longstanding problems with North Korea and Iran. That, in turn, meant that need for gold as a safe haven has reduced. However, the most compelling reason for the lower gold price was the announcement by the then Federal Reserve chairman Bernanke that the USA would reduce its quantitative easing (QEs) of $85 billion per month from as early as September. Although that deadline has passed, any reference to the ‘taper’ has resulted in a slump in the gold price. Moreover, even the new designated Fed chief Janet Yellen’s statement that QEs would continue into at least the first half of 2014 has not lifted the gold market as expected.
Then, technical chartists indicated that if the key support level of $1,250 per ounce were to be breached, the gold price could even fall close to $1,000 per ounce and test sub-$1,000 per ounce levels.
The above indicators caused many experts and analysts in the bullion market to predict a bear market for gold. Philip
Klapwijk, former chairman of GFMS (Thomson Reuters) and currently with Precious Metals Insight said in April 2013, “Gold is in a bear market at the moment”. He later revised his statement a couple of months ago to state unequivocally, “Gold is in a bear market.” Jeff Christian of the CPM Group also did not expect the gold price to have a great upside potential. He recently said, “The gold price would consolidate between $1,250-1,275 per ounce before trading in the $1,300-1,550 per ounce over the next couple of years.” Most analysts around the world now opine that gold is headed for a long bear market.
So, what awaits gold? What would be the key indicators that signal a prolonged bear market? First, positive real interest rates would herald investors to turn away from gold. With better returns from the financial markets, investors would leave gold and it would become a mere jewellery-making commodity, thereby adversely impacting the upside potential of the gold price. Second, emergence of hedging of gold by gold mining companies could indicate a deepset bear market for the metal. This could immediately put a lid on the gold price. Third, sale of gold by Central banks would be a red light for the gold price as was the case in the 1990s and early 2000s that had then necessitated an agreement to restrict sale of gold by Central banks to 2,000 tonnes in five years or around 400 tonnes per annum. Finally, investors who were long on gold for quite some time on commodity bourses will suddenly go short on the yellow metal and that could mean that the tide will have turned away from gold.
However, gold bugs still believe that it could scale fresh highs in the not-so-distant future. They believe that the dollar could be in a long bear phase and that could only benefit gold. Many in the US also feel that the recovery of the US and Eurozone would not last and one could see these economies take a turn for the worse, which could propel gold forward as QEs could then be extended for much longer. Jeffery Nichols, managing director of American Precious Metals Advisory is one such gold bug who is bullish on the gold price. He says, “We have long argued that a still fragile and feeble economy would weigh against early tapering – and believe that the Fed will postpone cutting back on monthly bond purchases until next spring or beyond.” He further adds, “Tapering or not, monetary policy will, in any case, remain a simulative pro-gold mode for months, if not years, to come as the US economy continues to struggle to regain its footing. … There is more to gold price prospects than US monetary policy and fiscal disarray.”
Some technical chartists believe that gold would first decline sharply to even below $1,100 per ounce and a strong support at below those levels could see the gold price take off from there – whether to above $2,000 per ounce or just a decent short bull rally is a matter of conjecture.
Of late, there is a raging controversy over GFMS/WGC demand data in the quarterly Gold Demand Trends (GDTs) reports. With Eric Sprott of Sprott Asset Management claiming that the WGC was understating demand for gold and thereby depressing the gold price. While the controversy could be a matter of debate in a separate article, the difference in data numbers could be attributed to the definition of scrap as per GFMS/WGC and the rest of the trade. GFMS/WGC take scrap as that which is sold for cash, whereas others could be taking into account even exchange of old jewellery for new as part of scrap. Whatever the controversy, there is a perception in the marketplace that gold demand is understated and that it depresses the gold price.
As far as India is concerned, it is all set to lose its exalted status as the world’s largest gold consumer to China. The year started well for India and it even surpassed all expectations in the first 4-5 months of the year when it imported over 600 tonnes of gold. The heavy imports could partly be attributed to the fact that the finance minister often telegraphed his intention to increase import duty on gold. However, after such high imports the Indian gold industry came under the dark shadow of current account deficit (CAD). An obsessed government (read finance ministry and the Reserve Bank of India) then throttled the trade by depriving it of almost all legitimate supply of gold as it raised import duty on gold in stages beginning a year ago to 10%. Thereafter, a slew of moves meant that gold imports became a trickle by June-July. The trade was left in a limbo over the 80:20 scheme of import for the domestic market and export of gold by not clarifying the scheme for over a couple of months.
Even after some unsatisfactory clarifications the supplies have remained severely hampered due to high premium on gold by importing agencies. The 80:20 scheme as understood by the trade means that importing agencies must first import gold for exports and only when the first lot has been exported by the time of the third lot, can imports then be made for the domestic market. Apart from that, the nonavailability of gold loans for the domestic market has hit the trade badly. There was also a great confusion initially on whether gold could be imported on consignment basis by the importing agencies. The recent directive allowing all entities in SEZs to import gold solely for export purposes raises more questions than really answering any. All the above factors resulted in high premiums of around $140 per ounce during the peak festival season. As a result, gold consumption during Diwali fell by over 30-40% across India, in some areas even more. Moreover, the depreciation of the Indian rupee played a major role in curbing demand for gold. For, even though the average dollar gold price fell by over 36% during the year, the rupee gold price fell to just around R26,000 per 10 grams in April and thereafter rose to over R34,000 per 10 grams as the rupee went to below R68 to a dollar from around R54 to a dollar earlier in the year.
After that, even though gold fell below $1,200 per ounce to $1,192 in June and vacillated between $1,400 and $1,200 per ounce since then, the rupee gold prices remained above R30,000 per 10 grams for most of the time. Even now with gold around $1,243 per ounce on November 26, the rupee gold price is still above the
R30,000 mark, thus curbing demand for gold to a great extent. The rupee gold price seemed to be too high for jewellery buyers and the international gold price too low, with little upside potential to tempt gold investors.
It would seem that the Indian government wants gold to be imported solely for exports as was the case with diamonds till the turn of the century. It has virtually taken the gold trade back to the days of the Gold Control Act without actually proclaiming the promulgation of the obnoxious Act. In all practicality, gold supplies in the domestic market are either by way of scrap or smuggled goods, with very little official imported supplies. Therefore, any reports about rise in scrap inflows could be viewed with extreme scepticism as some in the trade would try to camouflage illegal flows as scrap inflows. Moreover, will the recent policy decision to allow gold imports into SEZs only for export purposes by all gold entities in SEZs actually give a boost to round-tripping of gold, in any form? Is that the hidden ploy to control the CAD?
Today, gold fanatics expect the metal to reach fresh highs and scale the almost mythical $3,000-$5,000 per ounce levels, even as gold appears destined to plummet to sub $1,000 levels. So, will gold rise again like a phoenix and go into uncharted territories? The question is will gold make a final dash for glory a la Sachin before subsiding into a lengthy bear market? Or will it defy all odds and make gold bugs delirious by attaining unimaginable levels? Time is running out and gold’s hour of reckoning is just around the corner.
It would seem that the Indian government wants gold to be imported solely for exports as was the case with diamonds till the turn of the century. It has virtually taken the gold trade back to the days of the Gold Control Act without actually proclaiming the promulgation of the obnoxious Act.”
An independent bullion analyst, Sanjiv Arole was previously a metals analyst at GFMS for over a decade. He was also a consultant to the World Gold Council.