Gold price jumps 23% in 2019 on reduced supply, continuous buying by banks

The price of gold has jumped 23 per cent in 2019, the most in the last eight years, because of reduced supply and continuous buying by central banks. Investors looking for safe-haven assets against global economic uncertainty have also benefited the yellow metal. And, so did the trade war between the US and China leading to fears of a global slowdown, and the worsening geopolitical tensions. Silver also did well with 21 per cent gains, the most after 2010.
 
The rupee’s weakness against the dollar, however increased cost of imports, pushing consumers from buying gold unless necessary. Continuing rural distress and an increase in import duty on precious metals by 2.5 per cent are other reasons for the sudden fall in domestic gold demand in the second half of 2019.
 
The surprise import duty hike aggravated the situation with bullion dealers (holding gold imported before the hike) selling it at a discount. Unofficially, imported gold was selling at a huge discount for a brief period. If that was not enough, consumers also sold their gold to encash money during the slowdown. As a result, monthly imports (in tonnes) fell during the July- October period.
 
The much-awaited gold policy and spot gold exchange also don’t seem to be the government’s priority.
 
Yet, those holding gold are a richer lot. And the gains are much larger than any other asset class.
 
Another development in the domestic bullion market was the fall of a few big jewellers with whom consumers were investing money under monthly deposit schemes. After a few jewellers vanished with consumers’ money running into a few thousand crores, schemes run by other jewellers have seen redemption.
 
Analysts forecast more gains in bullion in 2020, but return expectations are now moderate at around 6-7 per cent.
 
“We expect the trend to continue in 2020 with the US Fed’s dovish economic move, which indicates interest rate cuts and the possibility of deferral of the second phase of the US-China trade war,” said Gnanasekar Thiagarajan, director, Commtrendz. Thiagarajan expects gold to rise to $1,565 per ounce in the overseas market and to over Rs 41,000 per 10g in rupee terms. Silver could see more upside due to rising industrial demand, he adds.
 
Goldman Sachs, in its recent report, forecasts gold to reach $1,600 in 2020 on expectations of weak global macro-economic data, looming geo-political tensions, and the impact of Brexit. But, easing of US-China trade tensions has also raised hopes of an economic recovery and reduced fears of a recession.

 
Kishore Narne, associate director, Motilal Oswal Financial Services, is, however, not very bullish. He says: “Earlier, we thought the first half of 2020 would be volatile for the bullion, but we see a change and expect volatility to emerge in the second half. Gold prices are likely to remain range-bound in the near term.” The jury is out on this.