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

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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.

Sidelin­ing gold

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.

In­dian co­nun­drum

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.

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