16/04/2013
Why I will gift a White Gold than a Yellow one
Gold Mayhem starts from second week of Feb. this
year and continue to bleed till now. There is blood on investor’s hands and
tears in traders. The party is over for bulls, and many bears like me who
predicted correction in prices a year ago and restate in nov12 that the
correction is not done, might be doing party on the floors. My phones are
ringing continuously investors and people whom I Know asking when to buy and
how much to buy. I try to check some facts and finds on current status on Gold.
Gold Crashed: But how this all
happened, this time its Cyprus which is having more than 2% of gold reserves as
per its GDP and Debt ratio, announced that it can opt to sell gold to reduce
the debt burden, Cyprus is having 13.9 tonnes of Gold which is 64.9% of its
total Forex reserves as per data compiled by IMF. But only 13.9tonnes of gold
may not be the panic point for gold investors or traders, there is something
more in the story which was scripting since long from last years. Fund investors and managers believe if Cyprus
gone for selling it might put pressure on PIGS nation too to lower their debt
to GDP ratio, which is at alarming stage as of now and they are surviving on continuous
stimulus package carved out by EU and IMF in recent years. Greece and Spain
have moderate 2-3% gold reserves compare to their debt and GDP ratio
respectively, but Portugal having highest among PIGS nation more than 8% as
percentage of debt ratio and near to 8% as percentage of GDP ratio, Italy
having 6% and 4% debt and GDP ratio respectively. The real concern of worry is
PIGS nation total holding is whooping 3228 MT approx 160B$ of Gold value considering
$1550 as median price, also consider one fact that despite a limit of 400MT sales limit as per
CBGA, European union has not sold gold much in last couple of years.
Dealing Room (Black Friday): On Thursday when
news broke out of Cyprus opting to sell gold worth £341m, it was business as
usual in gold and discussion was on whether and when the gold will bounce in
near term, By Friday it is clear that gold will tank further and it start
correcting itself in a manner never seen before, I have witnessed april’06
correction sept’09 and many 4-5% correction in gold market. But gold this time
not stopped and in last three trading session lost $240 that is biggest
correction in prices post 1980 crisis. Till Tuesday morning at the time of
writing gold was trading near to its 2 year low and touched $1321.70,it last
seen in jan’11. In last 5 yrs April has always been on the bear side, out of
5yrs, it has seen biggest downfall in 3 yrs. But there is always a hope in
market that gold will recover as it did so in past, articles across the web
suggests you to buy gold at this time and it will recover soon. This is what is
expected in any dealing room (physical/electronic) in gold market. Millions of
dollar wiped out and funds eroded in last three months. Gold is at 52W
low,-18.8% YOY basis,-20% YTD, its $600 down from its life time high and 31.2%
in percentage terms.
Central Banks & Big
Investors: A decline in annual investment was the
result of a divergence between institutional and retail investor behaviour. In
total private investment holding for gold fell 4.8% in 2012 versus 2011,
reflecting the increased sensitivity of gold market investors toward the price
of the metal? Demand from private investors fell 2 million ounces from the 2011
level, to 38.7 million ounces in 2012. CPM Group forecast that net additions to
investor gold holdings will fall to 37.6 million ounces this year, down 2.8%
from 2012.Soros Fund Management LLC, which is run by billionaire investor
George Soros, reportedly cut its stakes in exchange-traded products backed by
gold in the fourth quarter, according to filings from the Securities and
Exchange Commission, documents showed Soros Fund Management cut its investment
in the SPDR Gold Trust by 55% to 600,000 shares as of Dec. 31 from a
three-month prior period. Paulson & Co, the hedge fund founded by
billionaire Paulson, one of the biggest stake holders in precious metals
through mining co. and Gold backed funds, cut its stake in the SPDR Gold Trust
for the second straight quarter. Paulson held 17.3 million shares in the
exchange-traded fund backed by bullion as of Dec. 31, 15%
less than the 20.3 million on Sept. 30.Despite Paulson keep his holding in
SPDR,filling from CME suggests he has build huge short position in Comex Gold
to hedge its physical holding around $1660 level. In 2010 the central banks
have developed from net sellers to net buyers of gold, driven by a decrease of
sales from developed countries and an increase in buying activity from
developing countries. Given the low percentage of central bank’s asset
allocation into gold of emerging countries like China (2% versus about 70% in
countries like the United States, Germany and France), there is a solid chance
that the official sector will continue to be a net buyer of gold in 2013 and
even beyond 2013.We feel central banks’ purchases of Gold will continue, driven
by the prospect of further currency debasement and higher inflation down the
road. As well as seeking ways to diversify its reserves, China, may also be
looking to build up its Gold reserves with the idea that before too long it
will want to make the Yuan a freely convertible currency. So when Investors are
selling its time for central banks to come and rescue the market it helps to
stabilise the market and build some confidence and value among investors. But
in such a time why central banks go for buying gold? It is a bigger question.
Hedging & Geo Politics: As per gold mining reports published on
various forums and discussed on seminars, it is virtually zero hedging from
gold miners as they believe that Gold will remain in forever upside run. This
time more hedging will be seen on their books which results net short in
COMEX-Gold. Despite North Korea is warning of possible nuclear attacks gold
trembled like cards, earlier in general discussions I stressed that nothing
will happen to Korea and gold will fall without any glitches in that.
Geopolitical tension effects Gold prices in such a manner that it was a mere
co-incidence that on the death of Benazir Bhutto 27 Dec’07gold rose by $15 and
only quoted lower than that day price only 6 times on MOM basis in last 6 yrs.
Indeed geopolitical tension affect gold prices in short to long term, but now
in 2013 we are living in more peaceful world and US taking out from Afghan we
can least expect support from this side but surely from the gold mining
hedging.
Report
by ©Amit Daga
Asian Giants : Being the largest importer of gold in the world,
India accounts for nearly one-third of the annual demand with import bill rising
from $4.1 billion in 2001-02 to $33.8 billion in 2010-11.India is the largest
importer of gold. During 2011-12, India imported about 1080 tons of gold. The
total imports figure for 2012 was around 860 tons. Gold made life time high of
$1923/ounce in calendar year 2011 and peaked from those levels, but Gold in
Rupee terms made a life time high of Rs.98381.90/ounce on account of weaker
rupee in 2012.While gold since 1980 in US$ registered only 3.25 times growth,
gold in rupee terms become 21 times compare to its 1980 price. Of course the
biggest factor in this big difference is rupee itself, but the gap is bigger in
last 2 years gold in rupee rose by 29% YOY in ‘11 and 11% in ’12 but it rose by
only 8.9% & 8.2% in respective years. Higher gold prices in India despite
correction in western world create lack of demand in India coupled by higher
import duty imposed now to 6%.India is a huge market but due to higher
inflation and slower growth the money which was earlier pouring into assets
like gold is dimming day by day. There is thumb rule in economic books that
rising inflation is directly impacting gold prices, but in fact what we have
witnessed in last couple of years slower economic growth and inflation dent
gold demand in market, as in recent report Hong Kong bullion dealers reported
lack of demand from Chinese market as its house hold are over supplied with
jewellery and investment gold. China post 2003 was also the biggest factor in
gold prices. The last time any central bank gone for shopping was India and
China in 2009,RBI bought around 200MT and China announced its gold reserve at 1,054
tons from 600 tons in 2003,since than China has not officially add any further
holding to its gold reserves which is roughly at 1.7% to its total FX reserves.
A recent report published in Bloomberg also suggests PBOC may keep 2% upper
limit for Gold reserves in near term. Retail investors in India also shown
interest via gold bees and gold backed mutual funds but we can take benchmark
of NSEL E-Gold as trend in retail investor’s demand which can be shown in
chart. Imposing CTT also discourage investors to trade in Future market,
recently MCX shown huge drop in Open Interest and volume dip in most active
contract. This all indicates there will be lesser demand in gold at least from
these two Asian Giants in near term.
Source: Gold.org/statistics
Source:
NSEL Monthly Fact Sheet
Report by© Amit Daga
FED & US : US is on
recovery mode and that can be understood and read by the data realised in
couple of years, better employment data, lower unemployment rate and fiscal
deficit shown signs of recovery, in fact the most volatile real estate market
is also recovering which is a clear indicator of better prospect in future.
Gold remain on hedge books for hedge fund investors and money poured into gold
which is available so cheap through QE. But FED seems to be in hurry to cut the
QE3 by year end (85B$ per month) in laymen terms no more cheap money in system,
less inflation and a better outlook with real good money. This has prompted
investors to again invest in dollar and dump gold, Dollax an index of 6
currencies against dollar rose by 15% in last two years. Surely with FED now
dumping the idea of QE4 and rumours in circle are already high of possible rate
hike in early 2014, we could see more pressure on Gold side.
History revisit: In 1980 era when Gold prices shoot up to
$830,it was due to inflation and various economic instability reasons, but it
disappoints its investor when it drop to $250 in 2000, eventually at that time
UK sold approx 395MT gold worth $3.5B,it was called brown bottom (Gordon Brown
was Chancellor of Ex-Chequer) in market. May be in current time we could see
such event happen in future, but gold remain in bear period for almost 20yrs
after it touched $830 in 80-81.We can learn from history as it repeat itself
and gives inflection on future.
Current Outlook :In early
2012 when I prepared a outlook report on gold & silver click here http://t.co/upuPthkOIg and predicted for $1330 could be the downside
level for gold, nevertheless by Nov12 it didn’t happened, so I came up with my
another report click here http://t.co/CqLOUKEfav and suggest $1530
is on charts very soon. Next on chart click here http://t.co/Y9VBiIpgJu we could see $1259 is an ideal support and $1160
is very strong support in long term. Gold may not breach more than that
considering the fact that it will erode value of most of the central bank books
and to maintain a sum of % to their FX reserves they will come to rescue gold.
But it does not mean gold will again retain the bullish channel, it breached
that 12 yrs Bull Run at the start of 2013 and will continue to trade between
$1670-$1250 ranges for couple of months or may be years. My Earlier posted
report came long before all the major Banks lower their gold average for rest
of the year, after CITI, JP Morgan and Goldman Sachs along with Scotia Bank
published their outlook the selling start in market and the panic button as
suggested in chart switched by Cyprus rumour. Gold in rupee had given more than
45% returns in last 5 years and enjoy better return on 10Y.But the cycle may be
in reverse trend now. Rupee can go upside from here at least 6-7%,it will
impact hugely on gold prices in India, after MCX witnessed it biggest three day
fall in Gold prices, more downside is on cards. MCX Gold can touch even 22,500
and even further lower to 19k, if rupee plays better and gold continue its
downward moves in market.
Currency and Metals: Due to
currency devaluation gold has outperformed in EURO & GBP only underperform
in YEN in last 5 yrs. So when a US citizen is getting only 40% return on its
gold, European or UK citizen are getting more on their gold investment, there
are still room for further selling in gold market from these nations as demand
from retail investors will dip and supply of coin resale will rise. Both UK
& Europe is in tight position and economic stability is at verge. Since the
start of 2013 gold has given negative returns against all major economic
indicators except silver, from copper, oil, DowJones to Dollar and Platinum,
gold is underperformer in terms of return.
Its Platinum not Gold : Till 2008 summer
Platinum was traded twice of what gold quoted in market, as economic slowdown
prevails in world economy it start losing its value, huge investment diverted
to Gold. Now as economic indicators are showing positive sign we could see
upsurge in Platinum prices more in compare to gold. Even on technical chart
gold/Plat ratio is trading below its 50&100 DMA and inching towards 200 DMA.
So even if I have to do my SIP in precious metal I will prefer Platinum over to
gold.
Summary
and Verdict : Gold has
crossed it 12 yrs bull run cycle and now entered in bear channel. As per charts
Gold will readjust the next channel and will keep lower highs and higher low in
coming months. To invest in gold choose SIP as the best route and prefer to
invest your money around 22k or if you can wait till 19k it will be bargain
hunting. Platinum could a better option in jewellery and investment terms, as the
color of White is more inclusive than yellow. Choice is yours and you can take
the judgement based on your own assessments.
Disclaimer: Although the report is
prepared after checking facts & figure from reliable sources on web and
different forum, it is highly recommended that any error is not amount for
liability on writer’s part. Except few grams of jewellery inherited the writer
has no direct or indirect investment or vested interest in Gold.
Writer
is having seven years of experience in commodity and Forex market with core
expertise in analysis and trading. He also research on trading behaviour of
traders and investments of investor. He read and writes on politics and
economics and its inter-link effect.
©Amit Daga
