Indian Rupee eases to hit a low of 44.69 per dollar

The rupee dropped to its lowest level in more than 17 months in volatile trade on Tuesday, shrugging off heavy central bank intervention as the dollar rallied strongly against a basket of currencies. The partially convertible rupee closed at 44.38/44.39 per dollar, half a percent down from Monday's close of 44.17/18.

Dealers said a combination of capital outflows from the stock market, stop-loss positions being triggered and heavy dollar buying by oil refiners pushed the rupee down, adding the local unit could hit 45 per dollar in the next couple of days.

The rupee traded in a broad 44.14-44.56 per dollar band, and the day's trough was the rupee's lowest since March 5, 2007, when it touched 44.6950. Currency markets are closed on Wednesday for a holiday and trading resumes on Thursday.

At its low, the rupee has fallen 1.4 percent in the first two days of the month. It fell 3.1 percent in August and is down more than 11 per cent in 2008, making it one of Asia's worst-performing currencies. It rose more than 12 per cent in 2007.

"Dollar demand is huge and the supply pipeline is very thin as most exporters have sold their receivables and capital inflows have all but dried up," said J. Moses Harding, head of global markets at IndusInd Bank in Mumbai. Foreigners have sold more than $7.3 bn in local shares so far in 2008 pushing the stock market down by more than a quarter.

They bought a record $17.4 bn in 2007. A widening trade deficit added to funding concerns. The trade deficit in July was $10.8 bn, expanding from $9.8 bn in June. For April-July, the first four months of the fiscal year, the deficit widened to $41.23 bn between April-July from $27.35 bn a year earlier.

Central bank dollar sales between 44.20-44.55 ensured the rupee closed above its intraday lows. Five dealers at different banks estimated the central bank had sold between $1-$2 billion in the spot market, its biggest intervention in months.

One-month offshore non-deliverable forward contracts were quoting at 44.55/44.65, weaker than the onshore rate. In the futures market, more than 42,000 contracts were dealt with the near-month contract leading the way. It closed at 44.5450 per dollar.

Two dealers said some stop-losses bunched around the 44.40 per dollar levels helped the rupee lower. R.K. Gurumurthy, head of financial markets at ING Vysya Bank, said a clean break above 44.40 would be bullish for the dollar/rupee

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.

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