Gold prices likely to remain high in the current year due to Brexit

Gold prices likely to move up further in the current calendar year owing to uncertainties in the global markets as U.K. voted to exit from the European Union.

Gold prices shot up to its highest level in three years, in the aftermath of the Brexit referendum, on last Friday, as investors rushed to grab safer assets, leaving equities and other risk assets, which were already facing selling pressure.

Sluggish purchases

The prices of gold hit a three-year peak at around $1,355 per ounce on June 23, and hovering between $1310 and 1,320 per ounce in the international market currently. Earlier the highest price recorded was at around $1,900 per ounce in 2012 which moved down to $1,100 per ounce in the subsequent period, mostly attributed to the sluggish purchase by the central banks

“Later it recovered to US$1300 levels in the beginning of 2016 due to weak U.S. data. Last Friday it touched a three year high of around $1,355 per ounce on Brexit news. It is expected to go up to $1,400 per ounce in the coming days,” said James Jose, Secretary, Association of Gold Refineries and Mints, a national body for gold refiners.

On the previous day of the referendum in U.K., the gold price was at $1,265 per ounce and the Dollar index was at 93.87 and on Thursday, June 30, the Dollar index was at 95.75 and gold price was at 1315.65 per ounce. “As dollar strengthens, the price of gold is likely to rise,” said Hariprasad M.P. Senior Vice President and Head of Treasury and Banknotes, Centrum Direct Ltd.

Prices to rise

“Global commodities like Gold don’t overnight change the main trend. Gold is expected into a large sideways market having resistance at Rs 33500 - 34500 and at lower end Rs 25000 in the Indian market,” said Jimeet Modi, CEO, SAMCO Securities

The risk to reward ratio currently is not favourable for long trades. However in the short term there is possibility for higher levels but soon the gold price will try to catch up with the lower end of the trading band. However, to the extent of dollar appreciation the gold prices will rise in India, Mr. Modi added.

The disparity in the prices, he said, is due to conversion costs, which is more or less constant and will remain so. In fact the Indian price of gold is the derivative of international markets subject to currency adjustments. However Mr. Modi said during times of uncertainty gold has always found buyers. “But we believe such uncertainties don’t last forever, soon, the markets will discount the fact and move on. Therefore going with the crowd now may not be the wise thing in the gold market.”

In a statement issued last Friday, the World Gold Council (WGC) said that it expects to see strong and sustained inflows into the gold market driven by the staggering level of protracted uncertainty that investors are facing.

Small investors

WGC predicted that purchases of gold coins by small retail investors, which were already up sharply in the months running up to the vote (Brexit), should accelerate further. According to the world body, gold is a high quality and liquid asset and will provide investors with a hedge against market uncertainty, economic, political and intervention risk.

“The intermediate trend in Gold has turned positive from negative,” said Birendrakumar Singh, AVP , Systematix Shares & Stocks.

Upward trend

Time wise, he said, beginning from December 2015, the present upward trend would remain intact for a minimum time period of 6 months or it can even extend up to 18 months.

“Price wise the upward projection could be up to $1,509 or higher, it is the 61.8 per cent retracement level of the down trend,” Mr. Singh added.

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Government’s Gold Bond Scheme may not attain target

The government says its Sovereign Gold Bond Scheme got off to a ‘successful” start. However, industry officials say more needs to be done to ensure its success.

Economic Affairs Secretary Shaktikanta Das recently said the scheme received 63,000 applications for 917 kg of gold amounting to Rs.246 crore in first tranche.

“Sovereign Gold Bond Scheme will be successful if it is marketed like the Kisan Vikas Patra... allowing banks, post offices, NBFCs and jewellers to market it as well. Distribution is the key to its success,” said Keyur Shah, Chief Executive Officer, Precious Metals Business, Muthoot Pappachan Group. Presently, only banks and post offices are allowed to distribute the scheme. The issue is that the banks (distributers) need to be commercially incentivised to run the scheme, officials said. The commercial details are left to the banks, which were not yet been announced. “It can become more popular if more touch points or agents are allowed to market it, where consumers find it comfortable to go,” Shah said. The government is hoping to make the scheme more attractive to customers and reduce large scale import of gold.

“Increased accessibility to the product is an indeed requirement to draw more retail participation,” said Hareesh.V, Research Head, Geofin Comtrade Ltd. “Since the product is largely focused on retail investors, permission given to NBFC’s and retail broking companies to sell the product along with banks and selected post offices would attract more investor attention into the platform.”

However, according to him, applications worth Rs.246 crore in the initial attempt is a relative good number to begin with, but with more ideal selling strategies it would have a greater impact in the overall success of the scheme.

‘Ï will not say it is a success,’ Muthoot’s Shah said.

The government plans to distribute bonds worth 50 tonnes of gold in this financial year 2015-16, which is worth around Rs.13,500 crore. This amount was calculated on the basis of the draft document prepared by the Government in July 2015. In the current market price, it would be at around Rs.12,735 crore.

When contacted by The Hindu, government official, Mr. Das said: “I feel it (first tranche) is a success……our effort is to maximise the collection…we learn from every tranche and this is a continuous process.”

India imported Rs.2.10 lakh crore worth of gold (other than jewellery) in financial year 2014-15. Between April-September 2016, Rs.1.12 lakh crore worth of gold has been imported. As the price of gold is slowing down in the international market, according to sources, imports of gold in the current fiscal likely to escalate compared to previous year’s gold import.

The extension of the issue date of Sovereign Gold Bond indicated that the new scheme had a positive response. Applications for the scheme were accepted from November 5 to 20, and the earlier proposed date of the issue was November 26, 2015. Because of the large number of applications from banks and post offices, RBI has rescheduled the issue date to November 30, 2015.

Issue price
“Even though the issue prices was quoted higher against the ruling market prices, facilities like option to invest in paper form, no dilemma for keeping gold in safe custody and use as collateral for loans attracted the investor interest,” said Mr. Hareesh.

The bond prices were fixed at Indian rupee on the basis of the previous week’s (Monday-Friday) simple average of the closing price of gold of 999 purity published by India Bullion and Jewellers Association (IBJA). The quoted price for the first tranche was set at Rs.2,684 per gram. “The price pegged by the government was high against the then ruling market price during the application period,” said Mr. Hareesh. IBJA prices hit a low of Rs.25,355 per ten gram during that period and investors were pessimistic. Also he said that the conservative rate of interest, longer duration, exclusion of NRIs and tradability in exchanges were the other mind blocks among the investor group. “The price should be more dynamic to reflect the actual market prices. The current scheme price was fixed for a long period which was turned out to be higher than the prevailing market prices,” Mr. Shah added. The recently launched schemes on gold are primarily intended to reduce the country’s reliance on import and to manage the widening current account deficit. Gold Monetisation Scheme, Sovereign Gold Bond and India Gold Coin are the new investment arenas in gold initiated by the Government.

Sovereign gold bond scheme is intended to reduce investment in physical gold and promote investing in gold in demat/paper format. The key intention of the plan is to curtail gold import to the country which account around 800-1000 tonnes per year. The Sovereign Gold Bonds are issued by RBI on behalf of the Government of India. The sovereign bonds are restricted to Indian citizens, including individuals, HUFs, trusts, universities and charitable institutions. The minimum investment limit is 2 units (2 grams) and a maximum is 500 grams. Investors can apply for 2 grams and in multiples of one gram.

The bonds can be used as collateral for the loans. Loan-to-value ratio will be set equal as a loan against ordinary gold mandated by RBI.

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