Gold close to bottoming out?

When there is excessive currency volatility, people turn to alternative investments. That's often precious metals or more recently, cryptocurrency. Fear of high inflation also leads investors to precious metals, or cryptocurrency. 

There is plenty of currency volatility at the moment, and the consensus is that it's likely to continue. There are also inflation fears. Metals are up due to rising demand and crude oil is up due to fears of supply disruption as the US looks to sanction Iran.  If the trade war intensifies, there will be a further uptick in global inflation. 

In these circumstances, we’d expect the prices of gold and cryptocurrencies to be spiking up as the uncertainty grows. However, the market is always capable of surprising us. Gold has hit new lows recently, and bitcoin has lost huge ground. 

Crypto  has never been a mainstream investment option. There are regulatory issues that make it hard for Indians to invest in cryptocurrencies, since RBI's blanket ban on banks dealing with crypto exchanges. 

So, let's focus on precious metals as a more practical investment.  

The decline in the global price of gold has come after a three-year bull run. Gold prices are down 9 per cent since January 2018. There could be the usual festive season spurt in buying but Indian gold imports for 2018-19 are now expected to be considerably lower than in 2017-18 in terms of volumes, as well as value. 

In 2017-18, India imported (legally) about 955 metric tonnes of gold for a value of about $34 billion, according to the Ministry of Commerce. Between April-June 2017, imports hit 317 tonnes, whereas April-June 2018 saw imports dip to 246 tonnes. That was a fall of 23 per cent in terms of volumes. In value terms, Apr-June 2017 cost $11.25 billion whereas Apr-Jun 2018 cost $8.43 billion, registering a fall of 25 per cent. July saw imports rise, however, as jewellers replenished stocks ahead of the festive season. 

Lower gold imports will be a relief for the government, of course, since gold is consistently the second-highest item by value on the imports list. Given the rising trade deficit, lower gold imports are desirable. However, the lack of enthusiasm is puzzling, given the traditional Indian fascination for gold, and also given the fact that gold remains one of the few financial assets that can be easily used to launder black money. It is still legal to buy up to Rs 50,000 worth of gold with cash, without providing KYC. 

Even experts who track precious metals closely, tend to get demand estimates wrong, not to mention price projections. As recently as April 2018, experts were estimating that India's gold imports could rise by around 10 per cent in dollar value in 2018-19 over 2017-18. That looks unlikely now, given the Q1 trend. Indeed, experts now say that imports for FY 2018-19 will contract by 15 per cent by dollar value. 

One key factor influencing gold prices is a strong USD. When the dollar is strong, gold prices tend to dip because the price is dollar-denominated. The dollar strengthens when the US interest rates and bond yields rise. Hence, gold is inversely correlated to higher dollar interest rates. The Federal Reserve is likely to continue hiking rates and tightening dollar money supply through the next 12-18 months.  

There would be a price point at which mines would start cutting back production but that's likely to be quite a bit lower than the current levels. Apart from the US itself, major gold producing countries include China, Australia, Russia, Canada and South Africa.  All the other gold-mining nations have seen currency depreciation versus dollar. This means the cost of production has also dropped in dollar terms.  

Uncertainty is likely to mount significantly over a nine-month timeframe. There are elections in India, and in the US. There's Brexit. President Trump seems to be in serious legal trouble personally, while remaining determined to sanction Iran and to fight trade wars. The festive season should lead to a spurt in Indian demand. 

Given historical patterns, we'd expect gold prices to rise from here. If there is a steep correction in equity values, gold is almost certain to be the beneficiary of safe haven investments. If this logic holds, gold may be close to bottoming out at current prices, as demand rises. Of course, the market could surprise again.