 "In May, so far, 20 tonnes have been officially imported. Photo: Wikipedia")
The price of gold in India has seen a highest single day jump in the last five years, with the previous one being in August 2011.
Globally, too, following the UK votes favouring exit from EU, which is an unprecedented event, has seen nearly $100 per ounce jump in gold prices, which was not a usual phenomenon. After closing at $1313 on Friday, today it is trading 1% higher in early trade around $1325 per ounce.
There are several factors that suggest gold will be a preferred asset for all kind of investors — retail, institutional or even central banks.
1. In terms of sterling, the price of gold soared nearly 20% to GBP 1,000/oz on Friday, which fell later. However, it again went up today as lower pound meant higher gold price in pound terms, a better hedge against currency for UK investors. Sterling or British pound is trading at three-decade low.
2. Bank of England and other central banks are preparing to take all actions to address fears in market, which according to the World Gold Council report released on Friday evening said, “Central bank action has already capped the gain in other safe haven assets." This means gold will shine.
3. According to an analysis on implications of Brexit by S & P Platts, the environment will now be favouring low interest rates and "a lower interest rate environment on the back of elevated economic and financial market uncertainty, has a "more fundamental and sustainable positive impact" on gold." It however said, "A strong dollar should provide a headwind, however, while the increased volatility and prices should keep physical buyers out of the market for now. Yet as uncertainty in financial markets is expected to only increase in the months ahead, gold prices could benefit strongly in the medium term."
4. Institutional investors' gold buying has however increased as reflected in the rise in holding in world's largest exchange traded fund SPDR. On Friday, net addition in that fund was 18.5 tons to total 934.31 tons which in start of the June was 868 tons, largely believed to be bought by European and British institutions ahead of referendum. The SPDR holding was just 630 tons six month ago when US Fed raised rates first time after a decade.
5. WGC believes that, "Pension funds could start buying gold, a class not traditionally investing in gold," as portfolio diversifier.
6. The Council also said that, Pound Sterling is one of the few reserve currencies and central bank buying more gold is very likely. This will be true for all countries' central banks which need to diversify reserves to hedge currency risk. Brexit results has already started raising demand for separation from EU from other European nations like Italy, France and so on which is expected to increase global uncertainty.
7. Along with rise in gold prices, gold mining companies’ share prices were also rising as value of the gold stock with them, mined or un-mined has risen and now prices are well above their gross cost of production. Many of them may soon be out of debt and start making money. This means they may not be in a hurry now to sell gold for liquidity.
8. Another expectation is that when prices were $1200 and above, many of them had started hedging their future production in forward markets which means that the gold they were to mine in future were sold by them in advance. Now prices are quite above that level and a feeling will start evolving that they would have been better off had they not have hedged. This could result in de-hedging or buying back their forward sales which will further push up gold prices. That may happen in every correction, when profit taking happens, which will provide support to falling gold prices as overall perception about gold has improved.
9. Data on Shanghai Gold Exchange shows that volumes on its spot gold segment have increased to 346 tons on Friday against usual 100 tons daily volumes, suggesting Chinese demand resuming.
10. In India, however, gold was quoted at $40 per ounce discount, which means higher arbitrage by buying spot gold and selling on MCX and gold demand for exports that could be round tripping in nature. For a few weeks global uncertainty will support gold. The demand could see a boost once monsoon spreads and hopes emerge of a better agriculture crops, resulting in higher rural income. This coupled with festive season beginning in early July could further support gold market and hence push up prices.
