Got the key to goldy locks
Suresh Shah
Gold is flowing out of central banks? coffers as if there were no tomorrow.
For Indians it?s a boon. In fact, demand is soaring with every decline in value
India and gold are inseparable. The country?s age-old affinity for the precious yellow metal has remained intact. That, even as the central banks of some of the developed countries have started selling their gold reserves, with more expected to follow.
India has continued to be the leading market for gold. Demand gradually increased from 405 tonnes in 1993 to 507 tonnes in 1996, accounting for 15 to 18 per cent of the total demand in major markets. The average annual price in London during this period went up from $359.2 per troy ounce to $387.9. Indian demand thereafter has in fact soared with every decline in value.
Demand jumped nearly 50 per cent in 1997 to 737 tonnes, with the average price falling to $331.3 an ounce. It reached a new high of 815 tonnes last year, when the average price further declined to $294. Thus, in just five years demand has doubled.
It is worth noting that prices thereafter have continued to move southward with no hope of any major recovery in the near future. Market sentiment has been adversely affected by reports of the continued pressure caused by UK, Swiss and IMF sales. This brought down gold prices from $293.10 on March 9, 1999 to their 20-year low of $272.90 on May 19. Prices thereafter have lost further ground and are hovering in the narrow range of $253 to $258.
The UK treasury dropped a bombshell on the market on May 7, announcing that it would be selling 415 of its 715-tonne gold reserve through a series of auctions. It has already conducted its first 25-tonne auction and the second is scheduled for September 21, 1999.
Earlier this year, when the IMF announced its plan to sell 10 million ounces of its 103 million ounce gold reserve, it was met with strong opposition from the US Congress. Many argued that the plan would damage the already weak gold prices and hurt some of the gold-exporting impoverished countries which are targeted for relief.
The IMF had originally planned to sell the gold to finance its obligations under the Highly Indebted Poor Countries Initiative (HIPCI) and also to help fund its Enhanced Structural Adjustment Facility low-interest loan programme. The open-market sales plan suffered a further blow when gold hit a 20-year low in July after the Bank of England sold 25 tonnes of gold as part of its plan to cut its reserves.
Switzerland?s adoption on April 18 of a new constitution that could lead to eventual gold sales had no immediate impact on prices. The market, however, improved a bit on June 18 on the news that the Swiss parliament had rejected a constitutional amendment that would have allowed the transfer of gold from the central bank to third parties such as the proposed Solidarity Foundation.
When will the market get on the path to recovery? Many precious metal experts and analysts do not see the chance for any major improvement in prices in the near future. Some believe that prices may even drop further as it is difficult for the mines to regulate production in short term.
A poll of analysts conducted by Reuters in July 1999 had indicated that gold prices during the second half of 1999 should remain near 20-year lows averaging $257.70 an ounce. It further found out that bullion prices will average around $267.56 an ounce for the full year, 9.2 per cent less than the $294.70 forecast in the agency?s January 1999 poll.
Most analysts feel that gold?s future remains bleak with the IMF and central bank sales of gold reserves overhanging the market. Though analysts expect prices to lift slightly towards the end of the year, averaging $262 an ounce at the end of the fourth quarter from an average of $255.69 at the end of the third quarter of 1999.
Masahiro Arai, assistant manager, precious metals section at Japanese bullion house Tokuriki Honten, has stated that the bullion market will continue to focus on the expected sales from official reserves. While metals analyst Rhona O?Connell of T Hoare Cancord in London, felt: ``There is little doubt that the debate on the moral and logistical merits of official sector sales will continue to dominate the market for the next six months.??
Peter Ward, vice president, equity research at Lehman Brothers in New York, said the risk for gold prices remained to the downside. ``I am concerned on the one hand that $250 gold is not causing enough pain to trigger significant mine production cut-backs. On the other hand, it is really not stimulating the price-elastic response you would expect from the demand side either,?? he explained.
Some analysts, however, were optimistic even in bad markets. Like Solomon Smith Barney says: ``In the face of massively negative sentiment, we remain unrepentant bulls. Indeed, the longer prices remain entrenched at historically low levels the more convinced we are that the rebound ? when it comes ? will be more explosive than our 2000 AD estimate of $350 per ounce suggests.??
Whatever analysts may feel about the future trend in the price of gold, one thing appears certain. Indian demand will continue to go up, if the trend witnessed in the last four quarters is any indication.
From a demand of 174 tonnes in the third quarter (July-September) of 1998, it has gradually increased to 218 tonnes in the second quarter (April-June) of the current year. And with festival season approaching, demand can only go higher in the second half of 1999.
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