Thursday, April 18, 2013

RIP GOLD: Reported by© Amit Daga


                                                                                                                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

No comments: