Christopher Columbus set sail in early August 1492 with the objective of finding a new route to India (Indies) and get its riches in the form of gold, spices, silk, etc., only to land in the Bahamas and said to have discovered America instead.
Surprisingly, against the run of play, gold, which began the year well below the $1,300 per ounce mark, soared by over 20-22% by September 2019. Almost everyone in the gold industry expected the yellow metal to sail through to $1,600-1,700 per ounce levels in the current year at a canter.
The magical number of $2,000 per ounce seemed to beckon gold. Paradoxically, instead of gold, it was palladium that was very near the $2,000 per ounce mark at $1,990 per ounce level last week.
It is still not clear whether gold will breach the $1,500 per ounce mark again this year, but palladium could well scale the magical peak of $2,000 per ounce before the end of 2019.
Just over twenty years ago in the 90s, palladium’s all time high level was $170-odd per ounce. Then, platinum was the leader followed by gold. In racing parlance, palladium could well be the fluke horse that won the race. But, that’s another story; let us get back to gold.
Poor economic data from the US and FOMC’s dovish stance on interest rates (unchanged Fed interest rates in 2020, thereby fuel inflation) woke gold from its slumber and try to break through the $1,500 per ounce barrier.
It even scaled $1,487 per ounce on December 12 and appeared poised for greater heights in the hope that the US-China trade war would intensify as another deadline seemed ready to pass.
However, Donald Trump’s tweet that the next round of tariffs against China (deadline of December 15) would be cancelled nixed gold’s chances to soar high. Further, the news that the US and China had agreed on a phase one trade deal dampened gold’s charge.
With victory for the Conservative party in UK elections there is also some clarity on Brexit. As a result, gold will have to seek new avenues to surge ahead. Gold closed the week at $1,466.60 per ounce (London pm fixed).
However, the yellow metal that closed last week higher at around $1,476 per ounce in New York, continued to recover lost ground with London am fix of around $1,477.80 per ounce and in Mumbai the price opened at Rs.38,010 per 10 gms (both on December 16).
In the last couple of weeks of 2019 and then further into 2020, gold would look at more poor data from the US economy, Trump’s impeachment proceedings, more central bank purchases of gold, dovish stance by both the Fed and the EU, the unpredictable nature of the US-China trade negotiations, rising crude oil prices, geo political tensions and the US presidential election next year bringing with it more volatility in all the markets to aid in its bid to reach its magical mark of $2,000 per ounce.
Meanwhile, Central bank purchases and investment in ETFs were the star performers that propelled gold by around 22% by the end of September 2019. Net Central bank purchases aggregated around 550 tonnes till September end of 2019, while gold ETF holdings touched an all-time high over 2,750-odd tonnes by the end of the third quarter of the calendar year 2019.
Investors in the Western world turn to investment in gold ETFs in a big way whenever there is strife in economies around the world. After the global meltdown in 2008, epitomised by the fall of Lehman brothers, inventory build up in ETFs shot up by 623 tonnes during 2009.
As a result, gold prices scaled its all-time high of $1,926 per ounce in September 2011. Thereafter, when gold prices declined in 2013, there was a net outflow of 880 tonnes in gold ETFs as investors abandoned gold. Gold ETFs came to the forefront again 2016 when 539 tonnes of gold ETFs were added to the inventory.
In the current year too, the correlation between the gold price and holdings in ETFs pushed gold forward. In India, gold ETFs have never really taken off. It has remained merely another investment option for stock market investors.
Indians have an affinity for holding physical gold and appear not interested in any financial instrument without the option of holding physical gold. Moreover, the fact that gold ETFs entails demat accounts and PAN Card details for transactions keep the small investor away from Gold ETFs.
Finally, digital gold, the new kid on the block is still in its nascent stage. However, it seems to be the future of the gold market and could be a game-changer. But, for that India has to turn into a smartphone savvy nation soon.
The author is an independent analyst of precious metals and diamonds, who has worked with GFMS and WGC.