Investment consultant Chintan Karnani says that that the year 2012 has been very volatile for Indian gold prices and extracts four lessons from the price movements.
At the beginning of 2012 no one ever thought of a rupee weakness resulting in higher gold prices in India. There were a lot of physical dealers who brought gold at "unfix" prices only to incur losses. Traders in MCX also incurred trading losses.
Lesson One: Trend of the Indian rupee can dictate short term gold prices.
Intra day trend as well as short term trend of the rupee (USD/INR) will dictate gold prices. One should first determine the trend of the Indian rupee before deciding on buy gold at "unfix price" or invest in gold or trade in gold.
In 2012 the trend of the Indian rupee against the US dollar has had far greater impact than any other factor. In the next eighteen months there will be Lok Sabha elections which can result in either wave movement for the rupee.
Lesson Two: Quantitative easing by Federal Reserve and other central banks may not result
in gold prices rising.
The key reason for the rise in gold prices in 2012 is central banks resorting to quantitative easing measures by way bond purchases and interest rate cuts in September 2012.
In October 2012 gold prices fell from high of $1799 to $1674.80 on expectation that a strong US economy will stop further quantitative easing (QE3) by the Federal Reserve. Some of you may contradict this. A lot of gold jewellers brought gold at "unfix" prices at Rs 29,700-Rs 30,500 zone and after QE3 they had fixed gold prices when it rose over Rs 32,300 after QE3 only to regret later. Traders in MCX were heavily in loss when gold prices broke past Rs 32,000/ten grams after the quantitative easing three announced by the Federal Reserve in September. Their stop loss got triggered when MCX gold prices fell below Rs 30,500 in the first week of November. The rise in gold prices from $1526 to $1799 was mainly due to QE3 which had already been factored by the markets.
Lesson Three: Never ignore the fundamentals
When gold prices rose from Rs 30, 000 to Rs 32, 500 gold investment demand as well as gold jewellery demand fell in India. In fact scrap sales increased. Globally also only central banks purchased gold and Chinese demand for gold supported gold prices. Overall fundamentals were weak. It was weak fundamentals which prevented gold from rising. In our view more than 20 per cent of current gold prices reflect investment demand. If global economy shows signs of stability and sustained growth then gold prices are bound to fall. This has happened in October 2012 and there could be many more months like October 2012 if and when global economy stabilizes.
Lesson Four: Diversify
Whether it is the gold jewellers or gold traders, they all need to diversify. My experience with doing surveys in 2012 among common man is that they are getting more and more biased towards purchasing diamonds and other form of jewellery where pure gold content is very less. The trend in India will only increase over the coming years. This applies to so called gold traders of MCX. They also need to diversify into copper and other metals to get better returns. Jewellers as well as traders need to diversify to survive.
The Art of Jewellery | Vol 11 | November 2012