Economic Highlights
New Delhi, 13 March, 2017
Reserve Currency
GOLD CAN’T BE HEDGED OUT
By Shivaji Sarkar
Demonetisation, stricter Indian Government rules and
positive US
economic figures have led to a fall in gold demand as well as its prices
worldwide. Yet, gold remains the most sought after metal across the globe
despite losing its sheen since October, 2016, shortly before Prime Minister
Modi announced scrapping of the high value Rs 1000 and 5000 currency notes.
Ironically the demand for gold-backed ETFs and similar products reached a
three-year high in 2016, says the World Gold Council (WGC).
The demand for gold rose 2 per cent in 2016 to 4,308.7
tonnes, the WGC said pointing that investment demand was up 70 per cent
reaching its highest level since 2012. China continued to boost the
demand, however, as its growth slowed down. Attention also turned to Europe,
where investors added around 114 tonnes to their holdings as concerns grew
around the busy electoral calendar in 2017, with the Netherlands,
France and Germany all
going to the polls, says the WGC.
This is a pointer that gold remains a reserve currency amid
economic turmoil. The WGC predicts that gradually Indian demand is also to grow
as it comes out of the shock of note-ban. The falling prices may also attract
investors.
The US
the data, however, present is likely to be the greatest factor in determining
the prices which are seen sliding below $1200 an ounce. Better US figures,
improving job situation, prospects of Federal Reserve hiking interest rates and
a stronger dollar are changing the dynamics. The dollar is more lucrative as
investment for its easier liquidity. In Singapore, gold touched $1196.70 an
ounce.
The WGC indicates that India’s fight against black money
is having an impact on gold trade. The government had during the past about 18
months imposed several measures including putting a curb on high value cash
purchases, using tax-related PAN numbers, tax raids on jewelers, and promotion
of digitized trading. In November 2015, three gold-related schemes – India gold
coin, gold monetisation and sovereign gold bond schemes - were launched by
Prime Minister Modi to tap household gold stocks of around 22,000 tonnes. The
WGC, however, also states that many of these steps had less than the desired
effect.
It notes that instead of nuggets, the demand for jewellery
is growing. India
is the world’s largest market for gold jewellery, representing about 822 tons
(746 tonnes) of gold in 2010. Indian women own about 19,841 tons (18,000
tonnes) of gold jewellery.
“Over time, we
anticipate that economic growth and greater transparency within India’s gold
market will push the demand higher. By 2020 we see Indian consumers buying 850
and 950 tonnes”, WGC says.
In August last, the RBI set up a committee to study Indian
household financing pattern and why they spend large sum of money on gold. And
at the same time, central banks are increasing the gold purchases. The RBI
itself, despite preaching virtues of not holding physical gold, in November
2009, bought 200 tonnes of it around $6.7 billion from the International
Monetary Fund (IMF) that boosted gold’s share in overall RBI reserves to 6.13
per cent from 3.3 per cent. The purchase came close on the heels of the global
financial crisis, making it look like an effort to safeguard the country’s
forex reserves against the impact of the crisis.
The RBI with 557.7 tonnes of gold holds the 11th
highest reserves in the world. The RBI statement of March 3, 2017 says that the
value is worth Rs 1329 billion. The IMF rules say that countries can make
payments to it in gold. It virtually makes it an international currency.
According to the WGC, emerging market central banks have
been big buyers of gold since 2009. The purpose of holding gold as a reserve
asset by central banks is to diversify risks. This is the exact reason why most
Indians buy gold when they can.
Central banks across the globe are apprehensive about the
present rise of dollar. They have a feeling it can crash any moment as the
fundamentals are doubtful. Its rise is more linked to crisis in Europe, China and Japan. It can change with a slight
alteration of factors of the economy of any one, may be even India.
The gold investment demand, WGC says, would remain firm for
six factors: heightened political and geopolitical risks, currency depreciation,
rising inflation expectations, inflated stock market valuations, long-term
Asian growth and opening of new markets. In short, the crisis in commercial
banks across the world, including India, and low performing economies, makes
gold dependable.
This calls for the nations to reformulate their financial
policies. Decades of efforts by governments to decouple from gold has not
succeeded. Currencies may not have technically gold standards, but governments across
are trying to hedge these and the economies against gold reserves.
European countries are trying to boost economies through
various stimuli, which have a high social cost. It makes their currencies
volatile and recently many lost against dollar, including British pound amid
Brexit and feared exit of many others from EU.
So the world economy, since the 2007-08 crisis, has yet to
stabilise. The US
growth is uncertain in the long run more so as President Donald Trump experiments.
Even Gulf nations are facing difficulties amid slump in oil prices raising
questions whether oil should be called liquid gold.
Emerging economies face the worst uncertainties. India though
remains the fastest growing economy; global uncertainties are impacting it in
many ways. The country is doing many experiments to do away with the gold, but
it remains an integral part of the economy. Mere government rules may not
change the scenario though it may impact the course in the short run.
The WGC forecasts that as India comes out of shadow of
demonetisation and is bound to grow so would gold demand. It should be viewed
as a positive step and not a spanner in the wheel for the economy. Policy
makers need to look at the gold paradigm from a new perspective. All major
currencies have depreciated over the past century. It has to be integrated with
real economy. Gold cannot be hedged out. --- INFA
(Copyright,
India News and Feature Alliance)
|