Gold prices Falls

Over the past fortnight, we have seen a sharp fall in gold prices. This fall in price has stimulated demand for gold from consumers and investors across the globe. After a year of dull demand for gold, the sharp fall in prices provided a golden opportunity for consumers and investors waiting on the sidelines to buy gold. This spurt in demand shows that consumers and investors believe that gold is attractively priced at current levels (approx. Rs. 11,500 per 10 grams).

The past few days have been very busy for gold market traders and for employees at the gold vaults. Demand has been strong and widespread, with gold markets in the Middle East, Europe and Asia witnessing strong demand. The strongest demand continues to come from the Indian markets. This has once again reinforced the belief that there will continue to be increased demand for gold from consumers/investors in India. Gold refiners on the other hand have been literally struggling to meet the increased demand for gold.

Demand for gold in India has been so huge that despite a sharp increase in gold imports over the past fortnight, there has been acute shortage of physical gold in the market. Premiums charged by wholesale suppliers and banks have increased to abnormal levels, way beyond what has been seen in the past. What does this indicate? Is this a one-off scenario where refiners and suppliers couldn’t match the unexpected increase in gold demand i.e. they weren’t ready for it? or will there be continued supply constraints for a longer period of time?

The second scenario looks more likely.

An analysis of trends in the three main supply sources for gold (Gold Mines, Central Banks and Scrap Gold), will help to throw more light on this.

Supply of physical gold from mines has been virtually stagnant since the beginning of the decade. There has not been any major discovery of new gold reserves over the past few years. The process of exploration and opening of new mines has become even more challenging due to environmental bottlenecks, manpower, equipment and power shortages.

Historically, Central Banks have been active influencers in the gold market. There have been many instances in the past wherein Central Banks have aggressively sold physical gold, leading to depressed gold prices. However, recent trends show that the reverse seems to be happening now. According to the World Gold Council, trends indicate that gold sales by signatories to the Central Bank Gold Agreement (CBGA), could be the lowest since the CBGA was signed in 1999. With only one month to go before the year end of September 2008, only about 319 tonnes of gold have been sold so far this year by the European central banks. This is against their maximum allowable annual (September 2008 end) sale quota of 500 tonnes. Central Banks worldwide are putting increased importance on gold reserves especially in these times of global economic turmoil. The global economy is going through a pretty traumatic period, and the Central Banks believe that having gold to back up t heir currency is a good idea.

Gold Scrap (typically old jewellery and jewellery manufacturing wastage) has been a major source of supply over the past year. At the prevailing attractive price levels, consumers would be reluctant to exchange old jewellery for new and would rather buy new gold jewellery. The increased demand and higher premiums for physical gold over the past fortnight also suggests that scrap supply has virtually vanished.

The demand in gold just doesn’t seem to be waning. It is increasing every day. Buyers who adore jewellery and those preparing for the upcoming marriage season are rushing in to buy gold. Investors want to buy more gold to protect their portfolio from rising inflation, economic uncertainity and unpredictable and volatile stock markets. Investors in India, have also increasingly preferred to buy gold through Gold Exchange Traded Funds. Globally, investors who buy gold for investment purposes have preferred buying gold exchange traded funds rather than buying physical gold coins or bars. This trend is catching on rapidly in India. This is primarily due to the many benefits that Gold Exchange Traded Funds offer including lower purchase cost, purity, security, transparency and tax efficiency.

It is increasingly clear, that demand for physical gold is set to go higher in the near term especially given the current attractive price levels. Supply of physical gold does not seem sufficient enough to satisfy the needs of hungry gold consumers. The fundamental question is - "Where is the gold supply going to come from?" Gold Mines are not producing enough, Central Banks are selling lesser gold, Scrap Gold is virtually not available. We are still ahead of the peak demand season and facing a supply crunch already. What would happen when demand accelerates during the festival/marriage season that will start from mid September onwards? Where is the gold going to come from to cater to the peak demand?

Buy some gold now before the demand supply mismatch leads gold to higher levels.

VKGJDBPZVTSE

Indian Rupee falls to 17month low

The rupee fell to 17-month lows in opening deals on Tuesday, slipping below 44 per dollar, weighed down by weak Asian stock markets.

The partially convertible rupee was today at 44.01/02, a level it last tested on March 20, 2007 and 0.5 per cent weaker than Monday's close of 43.79/80.

Storm clouds over Indian market grow darker

The going will get harder for Indian shares this week as soaring inflation raises the prospect of higher interest rates, which could burn a hole in the pockets of consumers, slow down demand and hurt corporate earnings.

Throw in volatile commodity prices and the outlook gets more worrisome. With fears the global credit crisis could worsen there is little comfort for investors, who have already suffered big losses this year.

The risk of a downside is making investors nervous and many funds are sitting on cash. Large investors have moved to the sidelines on mounting expectation that shares will decline in the near term and throw up opportunities for bargain hunting.


Annual wholesale price-based inflation (WPI) in early August shot up to 12.6 per cent, the most in 16 years, strengthening fears the Reserve Bank of India (RBI) will hike interest rates and tighten money supply again.

Sonal Varma, economist at Leh-man Brothers in Mumbai said that the final WPI inflation to peak in October-November at around 13.5-14.0 per cent, but to stay above 10 per cent until February 2009.
A steep increase in salaries for some five million civil servants announced this month, ahead of national elections due by May, is expected to fuel inflation.

"The whole objective of monetary policy at this point in time, which is to contain and manage demand, is going to face hurdles," said Shubhada Rao, an economist with Yes Bank. "The pay revision is going to add to demand pressures on inflation."

Last week, New Delhi-based National Council for Applied Economic Research (NCAER) cut its outlook for economic growth to 7.8 per cent in 2008-09, saying high inflation and a global slowdown were major threats. In its forecast in May, the economic think-tank had forecast growth of 8.5-8.8 per cent.

Forecast revision

A week earlier, the prime minister's economic advisory panel had lowered its growth forecast to 7.7 per cent, slower than 9 per cent expansion in 2007-08. Last month, the RBI pegged down its growth projection to 8 per cent from 8-8.5 per cent forecast earlier.

"The brakes on growth have been brought about by the slowdown in global growth and high inflation," NCAER said in a report.

It said industrial output growth was expected to moderate to 8.4 per cent in 2008-09 from 8.6 per cent of last year, while farm output growth would slow to 2.5 per cent from 4.5 per cent. Services sector was seen up 9.1 per cent, slower than 10.8 per cent of last year.

Foreign funds, which usually set the trend for the stock market, have been voting with their feet as the economic situation worsens. Overseas portfolio investors dumped shares worth $775 million over the past six days, data from the Securities and Exchange Board of India showed.

D'Souza said the withdrawals were likely to pick up momentum and push the market down this week, with the expiry of monthly derivatives contracts on Thursday making prices more volatile.

The Sensex fell 2.2 per cent last week to 14,401.49, its second weekly drop in a row. The marker has dropped 29 per cent this year, with foreign funds pulling out $7.2 billion during the period.

Crude oil's 5.4 per cent slide on Friday, the biggest single-day tumble in four years, to about $114.6 a barrel should bolster sentiment when trading starts tomorrow, but the sharp swings will keep investors cautious, D'Souza said.

Although oil prices have dropped more than a fifth since hitting a record high above $147 in mid-July, the outlook is marred by geopolitical tensions between the US and Russia and concerns Opec may decide to cut output when it meets in Vienna in September.

Energy-starved India imports more than 70 per cent of its oil, the price of which has a heavy bearing on domestic inflation.

In July, Merrill Lynch strategist Mark Matthews said that if oil prices fell below $120, inflation eased and the US banking crisis ends, Chinese and Indian stock markets could rebound. For that to happen, it will take a few more months, D'Souza said.