Notwithstanding pull-back in the past two days, gold prices may fall further in India and may even go down as low as Rs 25,000 per ten grams in the short to medium horizon of 12 months as the yellow metal is losing appeal as an asset class in favour of equity, for now, according to an ASSOCHAM paper.
“A fall of Rs 2,000 or little more from the present level looks plausible in the near to medium term but going below Rs 25,000 per ten grams will attract a strong buying support and may lead to April like situation where the downward spiral had made buyers rush to jewellers and banks for enriching their bullion collection,” said the paper titled, ‘Will Gold Retain its Lustre in 2013?’ conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).
Gold price has been rising constantly for 12 years. It averaged just $271 per 31 gm (troy ounce) in 2001. By July 2011, it was above $1,600. India is the world’s biggest buyer of the metal, sucking up about 900 tonnes of the metal per year. Total global production is only about 2,500 tonnes a year. The rising gold prices, and that of crude oil, have more or less destroyed India’s trade equilibrium.
The paper found that one of the main reasons for a runaway rise in gold prices in India at least was the lack of investment avenues for the Indian middle and upper middle class. This is more so in the wake of inflation hovering around the double digit figure and the investors were finding it difficult to save their funds from the general price rise.
On the other hand, most other avenues like property were out of the reach for the middle class investors and the equity market was dull and drab. The movement in the stock market was limited to topnotch stocks and the retailers had burnt fingers by investing in small and mid-cap shares. In this context, the gold units had come in in handy, the report said.
On top of it, the traditional Indian value system was and will largely remain the biggest reason for the bullion buys in tonnes making the country the world’s largest treasure house of gold, no matter it has landed the nation face to face with the crisis of the current account deficit.
While the paper shared concerns of the government and thought that some of the measures taken by the RBI and the Finance Ministry had become imperative, it underscored the need for a lasting solution which would come in the form of finding new avenues of saving and investment. It , found that the newly announced inflation indexed bonds will not fit the bill since the instruments have a long maturity period while the secondary bond market in the country has not developed for the retail investors.
The ASSOCHAM paper contended that gold prices are not likely to fall below Rs 25,000 per ten grams for another reason, that is, continuous weakening of rupee against dollar. Expensive dollar will push the gold prices in India even as they may decline in the international market. The country meets almost all its gold requirements through imports which will again become expensive as the rupee is likely to see more pressure in the coming days.
There is also a real threat of smuggling increasing in gold because the arbitrage between the customs paid price and without the import duty would be tempting enough for the operators and smugglers to ship in gold bars and biscuits.
“We may be again reminded of large scale smuggling of the seventies and eighties of gold. In fact, the subject was so real that it had inspired several Bollywood film makers to go in for blockbuster films based on the subject of the gold smuggling through the sea route in mid-nights,”.
While certainly the situation may not be that bad, the temptation to smuggle in gold from Dubai and other free ports would only increase if a high level of customs duty is maintained and other import restrictions stay in force.
The more scientific way would be to tempt investors away by coming out innovative investment options which are safe, liquid and ensure reasonable good returns. “in desperation act , especially among the lower economic end of the society, people then tend to fall into unscrupulous elements like ponzi schemes and dishonest land and real estate developers, who bring bad name to the entire industry by their fly-by-night operations. “
The paper also suggested floatation of property based exchange trade funds so that the small investors can also take exposure in the real estate market. All these products will tempt away investors from gold.
In the mean time, bullion will retain its golden edge even as some pressure is induced from overseas over its valuation. Every dip in prices will then lead to accumulation of reserves by individuals, the paper concluded.