Gold glitters, gains

Gold glitters, gains

BureauUpdated: Friday, May 31, 2019, 08:30 PM IST
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A 50 gram standard gold bar is displayed at the National Indian Bullion Refinery (NIBR)'s gold and silver refinery in Mumbai on November 6, 2009. The price of gold surged to a record peak of 1,095.80 dollars an ounce at the world market in trading earlier this week in the wake of the International Monetary Fund's massive sale of the precious metal to India. The IMF announced November 3 it sold 200 tonnes of gold to India's central bank over a two-week period in October for a total of 6.7 billion dollars to bolster its finances as it increases lending amid the global economic crisis. India is the world's biggest consumer of gold, importing between 700 and 800 tonnes of the metal every year or 20 percent of global demand. AFP PHOTO/ Indranil MUKHERJEE |

Yes, it’s too early to predict; but gold has begun glittering again. And for the same reason: safe haven. When in doubt, buy gold, is what it has always been; and that’s a contagious feeling. After a lull of few years, gold is once again on the radar of those trying to find a safe store for their wealth – both individuals and countries. The lull had come because we had become a little less doubtful of the good days dawning – I mean on a global horizon. But now once again we seem to be a little less confident of our assumptions – the happenings of the last few weeks seem to be pointing to harsher winter.

Probably it all started with China. Well, that’s strange. The last bull run for gold was driven by China hoarding the yellow metal. Those were the days China seemed infallible – its appetite for the earth’s metals insatiable. And we joined it in the gold rush, pushing the price of the metal beyond never before. But then China’s appetite faded, and gold prices tumbled down. Now China – sorry, it has not regained its appetite; rather it has worsened. We are now worried about its health. And, to protect ourselves against the consequences, we want to take shelter in gold.

On the face of itChina is growing at an annual rate of 7%, the sort of growth the developed economies can only dream about. But that is the official version. Using a measure based onactual parameters of economic activity in the country like electricity use and rail freight, the London-based consultancy Fathom estimates that China is actually growing at 3.1% a year.That the Chinese government indeed does not believe in its own figures is evident from the way it is handling the interest rates.

In response to the global financial crash in 2008 China let its interest rates fall. But when it realised that its credit and fiscal boost worth 12% of GDP was rather excessive and was bloating the economy, it adopted a tight monetary policy. But the subsequent cut in benchmark interest rates from 6% to a record low of 4.85% suggests that the policymakers think the resultant slowdown has been too rapid.

A move away from over-dependence on exports has been an official policy of Chinese government for some years now. But the recent slack in exports has ruffled the government and goaded it to act. The cost of maintaining the yuan’s level against the US dollar has seen a drop in foreign exchange reserves and an 8.3% drop in exports in the 12 months to July. As a result of its weakening economy, China has abandoned its currency peg with the dollar and reduced the yuan’s exchange rate on three separate occasions in the last couple of months. Evidently the Chinese government is feeling the economy slipping out of its control. And that loss of confidence has been contagious.

The immediate trigger for the surge in gold prices, of course, seems to be the Fed’s cold feet on rate hike. Though Yellen blamed the hesitation on ‘worsening global conditions’, the state of US economy must have been very much at the back of her mind. She has tried to modify the message that the status quo on rates has sent by hinting at raising the rates in December; and backed it up by her prediction that inflation will be back at 2% level over the next two or three years. But that could be only a cover for the anguish within.

For the last seven years and more both the inflation and short term interest rates have remained close to zero. Has the US economy finally put behind its bad days ? It may be comforting to believe that. But not many are ready to swallow that. The Fed’s economic growth forecasts have consistently proven over bullish. For instance, three years ago, the Fed expected to see real gross domestic product (GDP) growth of 3.0 to 3.8 percent this year; currently, just 2.1 percent growth is expected. Needless to say, inflation forecasts have also run too hot: back in 2012, inflation of 1.8 to 2.0 percent was anticipated for 2015; but it is still at almost 0%.

But it is prophecies like that of Icahn that are sending investors scampering to gold. “Danger ahead”, says Icahn, an activist investor and a ruthless corporate raider, “low rates have caused bubbles in art, real estate and high-yield bonds – with potentially dramatic consequences. … It’s like giving somebody medicine and this medicine is being given and given and given and we don’t know what’s going to happen – you don’t know how bad it’s going to be. We do know that when we did it a few years ago it caused a catastrophe, it caused ’08. … I am more hedged now than I’ve been in years.”

The European Central Bank too has not mustered courage to raise the rates. On the contrary, it has asserted its determination to take further measuresto get inflation back to the goal of 2%.Revised forecasts have made it necessary to step up its quantitative-easing programme, announced in January and launched in March.

Three months ago, the central-bank envisaged GDP growing by 1.5% this year, 1.9% in 2016 and 2.0% in 2017. These forecasts have been lowered to 1.4%, 1.7% and 1.8% respectively. Inflation is also set to be lower than previously forecast. June projections showed consumer prices rising by 0.3% in 2015, 1.5% in 2016 and 1.8% in 2017. The latest forecasts are for inflation of only 0.1% this year, rising to 1.1% in 2016 and 1.7% in 2017. Even these lower forecasts may turn out to be over-optimistic as they were made before the panic in financial markets over a Chinese slowdown late last month.

Japan has fallen back into deflation for the first time since April 2013 in spite of the economic stimulus.The Central Bank of the Republic of China (Taiwan) has cut its benchmark rate by 12.5 bps to 1.75%, amid slumping exports. Norway’s central bank also did a surprise rate cut of 25 bps, noting that “Growth prospects for the Norwegian economy have weakened, and inflation is projected to abate further out.” The Reserve Bank of New Zealand cut rates a couple weeks ago and hinted at the possibility of further easing. The Reserve Bank of Australia is widely expected to cut by 50 bps when they meet in October.

As the global confidence recedes, the gold is bound to surge.

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