Will gold regain its luster?

In the recent months gold prices have plummeted. Gold as an asset class has been losing its shimmer. So, what has changed in the recent past to pull down gold prices? The unfolding   of macro-economic developments in both the world and domestic economy have   played their part in significantly driving the gold prices down.

One of the most important reasons is end of quantitative easing in US. The massive quantitative stimulus had been one of the reason for driving prices of gold. Against the weakening dollar since collapse of Lehman brothers,   and abundant quantitative   stimulus, investors had turned   to gold. As FED decided to wind up the stimulus the faith   in US economy started reinstating. Consequently the dollar has started appreciating, bringing down the prices of all commodities, including gold. Gold, until then, preferred as a store of value, started to lose its sheen. The price of gold started eroding and by October, 2014, it had tumbled to $1173.48per troy ounce. This was a significant drop compared to a high of $1414.15 per troy ounce on 30^th May 2013.

Although, Japan has announced increase in its quantitative easing this however did not make a   positive impact on gold prices. Japan’s share of domestic and global investment at 6% is very miniscule to make a dent on gold prices.

Slowdown and soft landing of the Chinese economy is a creeping issue. Last year, China overtook India to be the biggest buyer of gold. But as the Chinese economy soft lands, buyers there are playing the wait and watch game as to where gold prices settle down.

Back home in India the turn of events unfolding also affected gold prices. In 2013 in an attempt to cage the current account deficit, import duties had been imposed on the gold.  High import   duties   slowly made gold prices prohibitively high.  Higher import duties eased the pressure on   current account deficits, In   April -June 2014, it stood at 1.7% of the GDP, as against 4% of GDP  seen last year.

The difference between the international price of gold and the Indian market price, due to custom duties and other barriers also deterred Indian consumers. With inflation falling, WPI inflation has come down to 1.77% in October; from 2.38 per cent in the previous month.  Both these factors made consumers postpone their buying decision for long.  However   due to the cultural significance, festivities, marriages and celebrations   gold demand picks up during   October   months. Imports are typically strong around the last quarter of the year as consumers rush to buy gold to celebrate major festivals such as Dhanteras and Diwali. Consequently India demand for gold imports surged to 150 tons in this period, again leading to fears on the current account deficit.

However, with the gradual recovery of the U.S. economy, an upbeat trend in the Indian economy, the stock market at its roaring highs, and Brent crude prices dropping, one wonders as to what will keep gold glittering. For the near future one doesn’t see favourable prospects for gold prices which will hover around the bottom it has touched until there is a change in supporting factors.

The Government of India had imposed restrictions on import of gold with a view to have a control over the current account deficit. Pressures on the current account deficit have eased. There thus emerged a demand that import restrictions on gold be relaxed. The government has now taken a decision in the matter and relaxed the gold import restrictions. The fear still looms large that any relaxation of controls on gold imports will once again lead to deterioration in the current account deficit. But with the steep decline in crude oil prices in the international market government is confident of containing the current account deficit within reasonable limits.

Gold is sought after in India both for its own sake and also as a hedge against inflation. With the collapse in the price of gold in recent months its attraction as a hedge against inflation has waned. Real estate, gold and stock markets are three avenues competing among themselves as areas for investment in India. Of the three, the stock market has overtaken the other two in its attraction as an investment destination in the recent months.

While the craze for gold of the Indian consumer will never be satiated it remains to be seen whether the consumer will go after gold for its intrinsic value or as a means of earning financial gains. Perhaps the new gold rush is because of its low price. Buy gold when the price is low and hoard. Its price, consumers expect, will go up sometime in the future – may be only in the long term future. But this strategy satisfies both their craving for gold as well as that of earning financial gain sometime in the future.