Taking steps back to  move forward

Runs & Ruins was the title of a book authored by the Cricket legend, Sunil Gavaskar, after he faced tumultuous time in 1983. In that year, Gavaskar not only fared poorly (at times) but also lost his place in the team during the World Cup that year.

He bounced back to score his 29th Test century to be at par with The Don, and eventually surpassed that tally of 100s in the last days of the same year.

Gold had a similar experience in the last week or so, as it first rose to over USD 1,563 per ounce (intra-day) and even plummeted to a low of USD 1,502 per ounce (intra-day) on 4th September, only to recover partially and end the week at USD 1,523.70 per ounce (London pm fixed).

Gold rose initially during the week on the back of escalation of the trade war between US and China from September 1 and prospects of interest rate cuts by both the EU and the US Fed. The turmoil in Britain over Brexit and prospects of fresh elections there gave a boost to the gold price.

The already murky geo-political scenario only acted as a catalyst. However, the decision by the Hong Kong, chief executive, Carrie Lam, to withdraw the controversial Extradition Bill and possible quid pro by the US with a positive phone call to China brought the gold price crashing down to near the USD 1,500 per ounce level.

Even Fed chair Jerome Powell refusing to give any indication on rate cuts further dampened the sentiment. But, tepid US data on employment saw the gold price recover marginally.

Meanwhile, the domestic gold trade in India has been plagued by two burning issues; discount on the gold price and quality of gold bars now available in the marketplace. Let us look at both the issues in detail.

Discount: The domestic gold price is at a huge discount to the landed cost of imported gold. The landed cost is inflated by the 12.5 per cent import duty. The market has been at a discount for quite some time now around USD 20-40 per ounce; at times the discount is as high as USD 55 per ounce on unofficial gold as well.

This is mainly caused by poor demand on account of the very high price of gold in the international market plus the incidence of high import duty. The availability of cheaper unofficial gold does not help matters either. This has caused disruption in the trade and those who operate only with official gold are at a disadvantage.

The additional 3 per cent GST means further compounds the matter. Thereby, encouraging unofficial trading in a big way and pushing the trade partially underground.

Quality of gold bars: There is great discomfort in the market on account of the quality of gold bars available for the jeweller. There have been many instances where traces of other metals are found mixed within the gold bars, mainly platinum group metals (PGMs) metals.

This was also seen in the past as well. With the quantity of imported gold bars declining over a period of time on account of increase in dore imports as well as scrap gold, the issue of unofficial gold in the market place have risen. Therefore, quite suddenly the volume of locally made gold bars has increased substantially.

Thus, jewellers and other players have to bear of around 2 per cent loss or the quantity of adulterated material in the gold bars. The modus operandi followed is quite innovative and it seems that the packaging of popular local brands is retained and gold bars replaced by fake ones.

It was also reported that even internationally bars of a global refinery are similarly replaced by fake ones. So much so, that a trade body IBJA pledged to purge the menace from the market.

Meanwhile, the precious metals basket has been giving good returns during 2019. While palladium topped at 23.67 per cent (for the period, January 1, 2019 to September 7, 2019), platinum was next at 20.6 per cent, gold came third at 18.79 per cent and silver brought up the rear at 17.5 per cent (all prices being London pm fixed).

Not so long ago (say 20 years ago), platinum was the most expensive precious metal while gold came in second and palladium was a poor third around USD 100-170 per ounce. Now, does it mean that one should invest in the PGMs and not gold or silver?…

Most economists have predicted a recession and already a slowdown is seen in the global economy. Given that, and with both palladium and platinum being pre-dominantly industrial metals, their prices are likely to be impacted.

With even silver falling in the same category any slowdown coupled with the current geo-political situation could well see gold emerging as the ultimate safe haven for investors — the winner!

Sanjiv Arole is an independent analyst of precious metals and diamond, who has worked with GFMS and WGC.

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