2019 has arrived and with it the question- will Gold Shine this year?
In 2018, analysts believed Gold could add some resistance and at least reach somewhere closer to its peaks of $1900 per ounce, recorded during August 2011 (Gold prices crashed to $1178 per ounce by June 2013). A recovery has been on-going for at least six years now.
2018 offered geopolitical tensions, tough trade equations, and inflation projections that seemed like the perfect catalyst for the yellow metal to shine. However, the US-Sino trade war and the corresponding increase in trade tariffs did not cause a corresponding increase in Gold prices.
Factors that went against the yellow metal’s shine were the rapid rise of the US greenback and to some extent the volatility in crude oil prices. The US greenback appreciated by at least 5% in 2018 against a reserve basket of currencies. A strong US economy and rate hikes lead to the greenback’s appreciation.
Coming to the one big question for 2018- did Gold return its investors enough? The simplest answer would be a ‘NO’. Gold did not return any returns in 2018; at least not to those who invested in the yellow metal this year.
On 2nd January 2018, spot prices were reported at $1310 per ounce, and on the last day of the year, spot-prices traded off to $1280 per ounce, indicating a $30 per ounce decline. Spot gold prices slipped by 2.3% in 2018. Gold trading on the New York Commodity Exchange was down by 0.11% in 2018. Moreover, the average Gold Price in 2018 was around $1270 per ounce.
Now for the good news- Gold returned the least decline in 2018 than equities. For instance, the annual gains reported by stock indices such as Dow Jones Industrial Average (-6.70), Nasdaq Composite (-4.62), S&P 500 (-7.03), Nikkei 225 (-12.08%), Hang Seng (-13.61%), and Shanghai Composite Index (-24%) are all negative [As on 31st December].
However, from an India-specific context, the story appears a tad different.
The MCX (Multi-Commodity Exchange) reported spot Gold price at Rs 29358 per ten grams on the first day of 2018. On the last day, prices were reported at 7% higher, at Rs 31,504 per ten grams. Meanwhile, the Sensex’s one year gain was reported at 7.4% while the Nifty50 made a gain of nearly 5%.
Obviously Gold investments augured well for Indian commodity investors, however, slightly lower than stocks trading on the Sensex.
Startling Revelation on Supply & Demand in 2018:
Although the price in India did appreciate, data from GFMS’s third quarter assessment makes for a few startling revelations. GFMS data suggests that global supply declined by 2% while demand for physical Gold was up by 4%. What caused this demand?
From India perspective, GFMS says gold demand in Q3 2018 increased by 56.7% year-on-year as jewelers replenished stocks on lower gold prices. India imported 217.5 tonnes of gold in Q3 2018, up from 138.8 tonnes in the same period last year.
Surprisingly, jewelry consumption declined by 10% in Q3 from 2017 at 120.5 tonnes; fabrication demand, however, remained lower by just 1% at 156 tonnes.
Kerala, the state that contributes 15% of India’s demand was facing the fury of the once in a century floods. The floods impacted rural as well as urban buying behavior.
Another surprise was reported with the RBI purchasing Gold for the first time in 9 years.
The RBI was the latest to join at least 16 Central banks who purchased Gold since 2017. The RBI reportedly bought 9.46 tonnes of Gold in 2018 to shore up its reserves. Although the RBI did not comment on why it made that investment, speculations were rife that it may be linked to the Gold monetisation program.
Besides the RBI, central banks from Poland and Hungary too invested in the yellow metal. This was an important moment, since the Polish and Hungarian Central Banks had purchased gold for the first time in a hundred years.
Analysts think that central banks could continue their buying in 2019. Central bank buying Gold does not impact retail Gold prices much and hence it is unlikely to cause much flutter in 2019.
Globally analysts are hopeful that Gold will shine in 2019. Some of the reasons include a wild-swing by equity markets and a benign weakness predicted for the US greenback [owing to fewer interest rate hikes as predicted by The US Federal Reserve]. Other reasons include a benign weakness of the US economy, and a prolonged US government shutdown that could spur investors to safe haven such as bullion investments.
Analysts also believe that Indian and Chinese economies, the top two countries accounting as the world's major buyers of Gold, would be key to the demand and price. World Gold Council in its latest report on trends published in November is bullish on demand picking up, attributing it to economic growth in India and China. However, the Chinese economy had slowed for the seventh month in December and domestic demand has been reported as tepid around a time of trade wars. Demand is hence muted.
GFMS believes that farm incomes and a fall in price might be key to reinvigorate the demand for yellow metal in India. The Q3 update states that the Indian market is not fully adjusted to a price above Rs.31000/10gm as yet. The report says, “If the price remains consistently above Rs.30,500/10gm, demand will certainly drop in volume terms against the average Q4 demand that we have witnessed in the last few years. We estimate that Q4 demand will remain around 205 to 215 tonnes if the price stays consistently above Rs.30,500/10gm. If the price drops below Rs.30,000/10gm, we expect demand to remain around 240 to 250 tonnes for the period.”
In India, the next few months will be dedicated to the elections. The rural market, a major buyer, is reported as facing issues of farmer-unrest. There are also speculations on larger farm-loan waivers coming into play.
From an India context, rating agency ICRA was quoted in a PTI story as saying that they hoped for demand to pick up 6-7% in the medium to long-term. The agency said, "With 65% of population living in rural areas, favorable farm output in the last two years on the back of good monsoons has been a positive trigger for rural demand, where jewelry is a traditional store of wealth."
Average Indian users, may cheer up if the domestic currency gains the lost ground against the US Dollar. In 2018, the Rupee lost at least 10% against the USD. In 2019, the US Federal Reserve has hinted that it would hike interest rates only once or twice. Moreover, the US economy, analysts expect could slowdown, thereby offering the Rupee sufficient room to appreciate and cover-up for lost ground in 2018.
If the Rupee recovers lost ground, prospective jewelry and bullion buyers may see Gold prices cooling a bit in 2019.
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