What To Expect From Gold In Samvat 2076

Somasundaram: Well, we hear that it is much better than what it was during Puja holidays. Footfalls have increased and jewellers generally seem happy that customers have finally started coming in, but as you rightly pointed out the price level is 20 percent above in the last few months is acting as a severe head wind for any substantial increase in demand. So, our expectations are that it will be subdued, it will continue to be subdued. It will be better than what it was in last quarter.

Kulhalli: Yes, I do agree that the demands in the first six-seven months including the pujas have been dampened largely because of July month at least for us, brand Tanishq, Zoya and Mia. July has actually pulled on the entire growth story for the company in terms of its very healthy double-digit growths and July - one month - has pulled back quarter one and quarter two goes. Whereas August, September and April-May-July has been extremely good for us because as I said, Tanishq is in space of market share gain and all the gold work we have done in the past seemed attraction for the brand. The July month has pulled down our growth. We are growing as we speak, but those are very subdued growth compared to the plan that we have to bear and more importantly, I have seen a real good surge in demand and it is going much more healthier than last year. Actually as the matter of fact, we are going close to the targeted numbers of growth in the last six days compared to the same period last year. It is an interesting season, I have used the word to be compared exactly Diwali backwards till Dusshera and those periods sales we are clearly seeing a double-digit fueled by last five days of the month.

Somasundaram: Yes. First thing on the export front, what India has seen on price increase, every other market has seen it. So what we are seeing as pressure on demand is also faced by other markets. Its only ETFs inflow, which we have seen which is driven by investors sentiments, which actually risen very, very fast. The other part, the jewellery demand and the coins, parson coins remains subdued across all geographies. Now, coming back to what’s happening on the export front, India has never been a - yes jewellery exports are shown as big but quite a lot of it is also not a sticky demand and it is done more to the Indian diaspora outside. So, I think that fall has to do with the prices there is no other significance to it. We need a lot of infrastructure to increase exports. Bars, India refinery are unable to do so because of the high margin requirement and that is something where a regulatory change which is expected.

Somasundaram: Well, as you know ETF is also physical. It is allocated gold. It is kept separately. So, it is not a promise to give you gold, it is gold. It is held in gold bars with a custodian. But yes, it is not hold in the households. That, we have definitely seen huge inflows primarily in U.S. and Europe, various reasons including the Brexit and the anxiety around their economy and the U.S. interest rates. So, we have seen substantial inflows in the previous quarter as well and we are seeing the same trend this quarter as well that is quarter three and that trend seems to continue because gold is the best performing asset class today and you so see not only the long-term investors but also the short-term investors are actually moving quite a lot of inflows in gold. So, yes ETF continues to be a very attractive investment mode the moment as compered to the bars, coins and the jewellery.

Somasundaram: I see a positive time because this is a good time historically to buy jewellery. The second half has been the stronger part of the jewellery buying periods and the high of the gold rate of July — the lots of varying dates starting from now after Diwali — there is wedding season going on right up to February-March and as I said gold rate now is the new normal for the consumer. Yes, there is tentativeness in the consumers minds for sure, largely impacted by the overall economic conditions or the lack of spending confidence of the consumer. But see the wedding days you see the performance of gold jewellery doing better than coins for example. At the moment diamonds are doing better than gold, in the moment when we speak that it is higher than the gold. I foresee a reasonably good demand but yes it will be rooted to the extent that it won’t be the healthy growth that we have seen in last three years but it is going to be positive in terms of growth of previous year, is our expectations for next six months.

Kulhalli: We do track exactly like to like. Our data is not October month to October month but it is comparing what we call it Navaratri to Diwali, that 30 day period of last year we compare to this year and if I look at that, whole in block post 15 days post Navaratra was a very slow growth we are wondering whether this new gold rate will really impact us inversely but interestingly it is now picking up after Dhanteras. The last six days since Friday onwards we are seeing a very different fraction of consumption it is really because, I mean I can’t give numbers at this stage but it has been from flat to double-digit growth in the last six days. The same period, from Navartra to as we speak yesterday equal to the same period last year one day before Dhanteras to 15 days back. We exactly do same period comparison. That positivity one sees in the market for Tanishq plan that we are seeing a big jump. Specially as I mentioned earlier this is to do with people shopping closer to the occasion and that we are seeing this very often closer wedding days, closer to the Dhanteras, closer to the Dushhera. Last day also the day before Dusshera and Dusshera was a peak before that was very dull.

Somasundaram: As you know, we don’t forecast prices at all, but yes, we do give the factors which affect the prices. Looking at this the U.S. interest rate scenario, the global, the geo-political situation which has include the trade war and the central bank buying which are the three drivers of the gold price at the moment, if you look at them. And none of them are going to disappear in the short run. They are here to stay as we see I, Central Bank keeps continuing buying the gold. All the central banks, including the RBI has bought it. The trade wars don’t seem to abate and the U.S. interest rate scenario we all know has taken a 180 degree turn and that is going to continue. Given all these factors, yes, the drivers of price and demand seem robust. Demand will face head winds as Sandeep said people will get used to the new normal and because of the stickyness reason that is the stickiness of the demand and that too will come back. As we have already done the study in the past, gold demand in long-term is affected more by income than by any other factor and we all know that incomes are keep going to go up in India because of our GDP growth. So, it is sustainable I would say.

Merk: We see several different types of investors, who are in different phases, so to speak. One is the investor who just likes to diversify his investment portfolio. In some ways, investors like to have their cake and eat it, meaning they like to have their risk assets (equities) and gold. By adding gold to their portfolio, they have a reasonably volatile asset and they don’t have to add much to their asset for (the sake of) diversification. So, those investors have been there continuously. Then there is the other type of investor who is very sensitive to real interest rates. Meaning, the one thing that gold doesn’t pay a dividend with (or competes with) are bonds.

Bonds are rallying, especially when the U.S. 10-year yield is low then gold tends to do well. That is very sensitive to tensions in trade, because when there are tensions in trade, bonds tend to rally, which is a good thing for gold. So, the easing of the trade tensions is a headwind to gold. Then there is the Federal Reserve. What I see ultimately playing out is this is not ultimately going to be a straight line. It’s in the president’s interest to have trade tensions in the news, but at the same time to ease them a little bit. Then the last thing, aside from the physical demand, is the return of inflation into the system. This is a fairly low-probability scenario, but I wouldn’t rule that out. We have low interest rates if we have the easing of trade tensions in addition to that.  We are also adding hundreds of thousands of people this year to the census. So, if this economy doesn’t fall into recession in the U.S. but improves, that could create volatility in the market and ultimately benefit gold, but this is not going to be a straight line.

Merk: Let’s talk briefly about the Fed’s balance sheet. The increase of the balance sheet is really a technical issue because the short-term rate market isn’t functioning the way the Fed would like it to be and see that money is making it to the right places. (In a situation that is) different from QE, they are buying treasuries. In some ways, this is technical and shouldn’t matter. That said, the Federal Reserve has been particularly bad in communicating its strategy. This is probably because the Federal Reserve has been making up its strategy on the fly, which it has been doing since the financial crisis.

I think it would be more beneficial if they changed a lot of their holding from long-term to short-term. But yes, the short of it is that the Federal Reserve balance sheet will be growing. Indeed, global balance sheets are also growing. This will be supportive of gold. This won’t be significant because it is mostly technical. But yes, the signs are that we are pretty much in that (direction) again.

Merk: Yes there have been several countries, including China. Several countries have been buying gold. That is supportive of the price of gold in the medium term. Germany has also disclosed that it has increased its gold holdings in many years. Though a small amount, this shows that a country which is faced with negative rates may go down that route.

We have to see if this increases to a bigger amount. But there is a negative rate that motivates some of these countries. But more importantly, many countries are looking for an alternative to the dollar. That’s not easily had, but the U.S. markets are the most liquid markets. As countries are struggling to find alternatives, gold is beneficial.

Merk: When gold is out of favour, nobody wants to look at it and when it is in favour, everybody jumps on it. So, that comes with gold partly because of the fundamental analysis that people do. They look at technicals and so, everybody is sort of jumping on the same trend and yes, that can exasperate trends, that increases volatility. Historically, volatility in the price of gold has been reasonably high, and we have seen only a little bit of that, and I think, we’ll see much more of that. Ultimately, the CFTC data, the speculative data always come out with a lag.

They are one of the items that one can monitor. I think the bigger indicators are the really risk-sentiment data. I should’ve mentioned earlier that if you have a bear market, gold has historically done well and the reason is when you have a bear market, volatility tends to grow up and when you have a cash flow like equities, you have a greater discounting of that cash flow. The good thing about gold is not having a dividend or cash flow is, there is no greater discounting so, it tends to do well during those scenarios. So, volatility is a better technical indicator rather than the CFTC data but yes, it’s something to keep an eye on often when those possessions pile up, you can have a redressal.  

Merk: Well, uncertainty in some ways as I just mentioned, when it translates to volatility, that tends to be good. That said, the market has a way to get used to things; you would think so at least, so the terrorist attacks that we’ve had, they used to raise the price of gold to higher. Unfortunately, those things have become routine. Brexit has become this story that will never end. What we’ve seen in recent weeks, the equity markets have become sensitive towards what’s happening with Brexit. The one thing that I mentioned earlier, the easing of trade tensions might be a headwind to gold; similarly, the easing of Brexit tensions might be a “headwind” to gold as there is more certainty in future. Individual investors seem to be—in the U.S. at least, according to surveys—most uncertain about what’s happening. There is a lot of policy uncertainty, there’s the U.S. election coming up so we can always pick up our favourite uncertainty.

Ultimately, what we do have gold as a diversifier for those who want it for equities and then, there’s the question on the interest rate side. Will real interest rates, those net of inflation, move higher? Even if we have a little bit of improvement in that; we have an easing of Brexit uncertainties, I do not see how the current Federal Reserve, in particular, is willing to do that. Keep in mind that one of the things I am concerned about is inflation. The reason why I am concerned about it is that the wages, which haven’t gone up substantially, (but we have around 3 percent year-on-year increase and unemployment rate) is a bit low.

I am concerned about inflation, but the Federal Reserve is not at all. They say, ‘Oh higher wages are good for more purchasing power,’ that’s of course unless you run out of workers that you can hire. So, those sort of uncertainties and those sort of risks I think will be a bigger driver of gold and I don’t think that gold is going to shoot to the roof here because there is no easing of the tensions but all these dynamics have to play out and the medium term will be supportive for the price of gold.

Merk: The Indian consumer is quite sensitive to the price of gold and yes, the Indian consumption of gold does have an influence on the price. We are too focused on CFTC data. The wedding season in India, of course, has an influence. Now, just a word in the manner of supply maybe in general. The large gold mining companies have substantially under-invested in recent years.

Now, they’ll probably “fix” that by acquiring smaller players. Those sorts of dynamics will exacerbate the boom and bust cycle we’ve had in the industry. Whether that in itself will influence the price of gold that we may have seen but as the price of gold goes up, small projects get funded and we see a lot of funding of small projects. Now that doesn’t translate most to my mind tomorrow because most of these projects take many years but that is part of the reason why I have this boom in markets last for many years as the demand is picking up as we’ve seen now. There isn’t much supply but ultimately down the road, we’ll probably have too much supply again when we are at the tail end of the current bull market. 

Merk: Yes, when we prepared for this interview you asked me this question and I dodged the question simply because it’s always very difficult when we reach a target and then we go away from it again. I do think that we’ll be here in a range that is going to be no more than about 5 percent down but potentially, a 10 percent up from here, I do think that 1,600 by the end of next year is possible. Where will it be at the end of this year? I don’t have a crystal ball.

But so many things can work in so many different ways and some of it is good for the economy are some of it are bad for the economy. The key thing that I am looking for right now is not just Brexit but the trade deal with China; the phase 1 deal with China is to be actually signed by the end of November and depending upon how the markets react to that if the Federal Reserve is quite not likely to be cut further in December. I think we might be range-bound for the end of the year but it all remains to be seen as always something that surprises us from some direction.