The Race for Gold: Current state and Future Prospects

Contributed by: Kunal Sabnis, CFA

In the midst of the global turmoil led by Chinese currency devaluation, issues of sluggish growth and falling commodity prices have become profound. To decode this, IAIP, in association with National Stock Exchange (NSE) organised a panel discussion on Aug 28, titled ‘The Race for Gold: Current State and Future Prospects’. The eminent panel consisted of Sudheesh Nambaith, Senior Analyst – South Asia and UAE, Precious Metals – GFMS; Keyur Shah, CEO – Precious Metals Business, Muthoot Pappachan Group; Bhargava Vaidya, Proprietor – B.N. Vaidya & Associates; Sanjeev Agarwal, CEO – Gitanjali Exports Ltd. and Chirag Sheth, Chief Research Consultant, South Asia – Metal Focus. Manisha Gupta, Editor – Commodities & Currencies, ET NOW moderated the panel discussion.

Excerpts…   

Manisha started the discussion commenting on the recent drop in gold prices owing to falling demand, 10% import duty and 80:20 import scheme which was eventually scrapped.

Sudheesh Nambaith, Senior Analyst – South Asia and UAE, Precious Metals – GFMS

Gold, a household saving instrument, has withstood the test of time and has played an instrumental role in uplifting communities during times of crisis through either monetising or availing a loan. Due to this, government has to take holistic view of gold as a saving instrument and the increase of LTV from 60% to 75% was a move in the right direction. Sudheesh does not expect further curbs on gold by the government since imports are at a comfortable level. He believes that INR 26,000/- is a good level to invest in gold considering further yuan depreciation will put pressure on the rupee, making gold expensive domestically. Gold, a leading indicator for commodities, has already made a bottom and other commodities will follow suit. He further stated that Indians should also look at investing in Platinum.

Keyur Shah, CEO – Precious Metals Business, Muthoot Pappachan Group

A large part of the population remains out of the purview of the banking system, making them dependent on gold. Gold lending business largely depends on gold price. Gold jewellery is of various standards and purity and it is difficult to convince borrowers of the differing purity level in their gold. Hallmarking has brought standardisation to the industry. Gold is used as an easy store of black money and Keyur believes that once government sorts the black money issue, gold would be on par with other instruments for promoting investments. He believes that the gold industry should move towards digitisation for easy storage and trade.

Bhargava Vaidya, Proprietor – B.N. Vaidya & Associates

Gold is a store of value and Indians personally hold a lot of gold which makes it less essential for the government to hold large quantity of gold reserves. Gold bonds and monetisation are steps in the right direction but government’s decision to promote gold coins was surprising. Sovereign bonds will be very beneficial since they are expected to earn 2% on gold that today remains idle. Hallmarking has infused trust in gold investment and gold should be a part of everyone’s portfolio. SEBI-FMC merger will be a game changer for gold investing since mutual funds will be allowed to invest in commodities. Bhargava expects 3-4% annualised return in gold going forward.

Sanjeev Agarwal, CEO – Gitanjali Exports Ltd.

Sanjeev believes that over the last few years, investment demand for gold has gone up multi-fold while demand for jewellery has reduced. He expects that jewellery demand will pick up considering the relevance of gold will never go away. China’s gold demand will be high due to its aim to be a global reserve currency. Countries whose currencies are considered as reserve currencies by the IMF hold around 50-60 of their reserves in gold whereas China’s gold reserves accounts for just 3% of its total reserves. Curbs imposed by the government on gold import in 2013 were not justified and led to higher smuggling of gold. Move by government to sell gold coins minted in India is positive since refining capacity utilisation today is at 25%. Gold coins sold by banks were minted overseas, contributed to the CAD and were charged a higher duty. Sanjeev expects that the demand for gold jewellery will be strong during the festive season if the price goes below INR 25,000 per 10 grams.   

Chirag Sheth, Chief Research Consultant, South Asia – Metal Focus

China has demonstrated the fragility of a manipulated economy and India will surpass the Chinese gold import soon. More than a consumption market, China should be viewed as a trading and mining hub. Chirag expects Gold to trade around $1,250 per ounce by the end of this year. Its takes 10 years for a gold mine to commence operations hence the decision to stop mining is not based on gold price movements. Today only 7-8% mines in the world are making losses. World production will incrementally taper since pipeline of mines coming on stream is diminishing. He believes that Indian and Chinese demand will proved stimulus to gold pushing it to $1350-1400 over next two years.

– KS