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Gold economics in the time of falling international prices of gold

Last updated:  Nov 27, 2016

India closely followed by China is the largest importer of gold. Around half of the imported gold is used in gold jewelry. Also, gold is a place to invest for tens and thousands of middle class and an upper-class populace who find real estate tricky and stock market underperforming for the last five years. At a time when the price of gold in the international market is down by more than 30 percent from an all-time peak in mid-2011, financial analyst Hamsini Amritha writes, “It’s a great opportunity to invest in gold now – and being in India, gold can never go to waste.”

High current account deficit (CAD) as seen in April 2013 of USD 18 billion and May 2013 of USD 20 billion was primarily led by gold imports of roughly around USD 7-8 billion each month. Depreciating Indian Rupee (approximately 8 percent this year) is believed to be attributed to a large extent on the surge in gold imports. The government has responded by raising import duties in order to reduce domestic demand.

It is said that the current international price of gold is now close to the cost of production. The price of gold cannot fall below the mining cost of the metal. Else, mining firms will shut up their operations. This means that we are at the bottom of where the price can only go up.

Interesting to note is the approach taken by Mike Maloney, author of Guide to Investing in Gold and Silver, under GoldSilver Insider Program. The program states, “You will remain GoldSilver Insider until we execute our final Exit Strategy communication. So if it takes 2, 3, 5 years or longer… all Insiders will receive our final Exit Strategy communication.” Interesting contra bets can be learned from here. However, as they are in the business of selling gold and silver as well, impartial advise is doubtful. Mike’s forecast that US Dollar will eventually collapse being a fiat currency may prove true in a very long term, but in the long term, we all are dead. Investments are meant for individuals who prefer to bet for 10 to 20 years for maximum. Nevertheless, the website is full of vital information that readers may not find elsewhere.

On a broader note, trading/investing in gold is a continuous process as other commodities. A balanced portfolio contains a mix of equity stocks, bonds, commodities, and real estate. According to V Balasubramanian, VP, IDBI Mutual Fund, “Gold and equity are not products that compete with each other, but for an investor, who has a long-term goal, both asset classes are expected to supplement each other and a proper asset allocation strategy among these would help achieve maximum returns.” So, it is important not to be overwhelmed by investing in gold (and silver) alone unless one has done serious research.

Apart from the physical purchase of gold (like gold bars) and ETFs, investment in gold can be through buying stocks of gold mining companies like Barrick Gold listed on stock exchanges. Another indirect way to invest in gold can be through listed jewelry stocks like PC JewellerGitanjali Gems, and Titan. Here one gets an opportunity to ride with other precious metals like diamond, platinum, silver along with growth in the fashion industry as a whole. These jewelry companies have gained in terms of revenue during this time of low gold prices. For instance, PC Jeweller for the year ended March 2013 posted Rs. 4,018.42 crore in net sales from operations compared to Rs. 3,041.93 crore for March 2012, rising by 32 percent. The range of products includes gold jewelry, diamond jewelry and other jewelry including silver articles.

In the meantime for those jewelry firms sitting with large gold inventories at higher prices, fall in the international price of gold means value erosion. Add to that surge in import duties from 6 percent to 8 percent in June 2013 which deterred domestic firms cash in from increased sales of gold jewelry products from the low price of international gold. According to V Balasubramanian, “The decline in the international price of gold was partially off-set by a fall in the value of the Indian rupee which prevented domestic price depreciating in the same rate as that of international gold prices. The fall in the value of rupee reduced the impact of fall in the price of international price of gold by around 50 percent.”

Here are the advantages of investing in gold through Sovereign Gold Bond (2016) scheme launched by Govt. of India: “The quantity of gold for which the investor pays is protected since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewelry form. The bonds are held in the books of the RBI or in demat form eliminating the risk of loss of scrip etc.

The announcement of demonetization of 1000 Rs and 500 Rs banknote on November 8, 2016, by Indian PM Narendra Modi reiterates the importance of not holding wealth in one currency, but distribute through other forms like investing in gold, real estate.

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