Gold & Silver

‘Global uncertainties will fuel gold for a year more’

Rutam Vora Ahmedabad | Updated on September 13, 2019

Arvind Sahay, Chairperson, India Gold Policy Centre at IIM-Ahmedabad.   -  THE HINDU



Is the recent gold rally an indication of an impending recession? Drawing a parallel between the trade wars of the 1930s that triggered the Great Depression, and the ones happening now, Arvind Sahay, Chairperson, India Gold Policy Centre (IGPC) at IIM-Ahmedabad, spoke to Businessline about what possibly lies ahead for gold amid the prevailing local and global economic uncertainty. Excerpts:

What do you think is causing the recent gold price rally?

We have been saying at the IGPC since last December that gold prices are set to go up. It is likely to go up till at least the second half of next year. There are global and domestic reasons for this rally.

There is a growing concern about macroeconomic uncertainty. The US-China trade war is getting nastier. Now, the US President wants American companies to come out of China. The global financial system is under stress.

The banking systems in India, the US and Germany are facing stress. In India, exports are stagnating. The auto sector is in a bad shape. People are postponing purchases. In the times of economic uncertainty, people turn to safe havens. Gold is a safe haven - it always has been, through history. This triggers demand and hence there is an increase in gold prices.

How serious is this global economic uncertainty?

An important indicator is that the bond yields have started turning negative. We are going through a phenomenon called ‘inversion of yield curves’. Normally, longer-term bonds give higher yields. But when shorter-term bonds yield more, the yield curves invert. This has been a predictor of recession. In the past, when the yield curves inverted, recession followed within 18-20 months. This time, it has been about 10 months since we saw the first inversion of yield curves.

This happens because there is uncertainty among investors. They are uncertain about the longer term. They are only a little certain about the shorter term. The shadow boxing between US-China, Russia-US and China-Iran-US has shaken the confidence. The problem is getting compounded. India is also seeing a similar phenomenon.

So are we headed for a recession?

The last time there was a tariff war on this scale was in the 1930s. Starting from the US, the Smoot-Hawley Act had increased tariffs, triggering retaliation around the world. Trade dropped steeply; therefore economic activity dropped and caused unemployment. This led to the Great Depression.

The US economy had contracted by about 33 per cent during 1930-38. That is a potential outcome of a trade war. It was true then and it is still true today. Trade wars need to get resolved in time. Can’t say if it’s recession, but we are definitely headed for hard times.

How are central banks behaving amid all this? Is their action fuelling the gold rally?

Because of these uncertainties, the central banks the world over have also started accumulating gold. In calendar year 2018, they had accumulated about 600 tonnes of gold, which is the largest accumulation by central banks in the last 50 years.

India also bought 40-50 tonnes. Others include Russia, Turkey, China and Germany. In 2019, as of August 31, over 450 tonnes have already been bought.

This shows the run rate is similar or may be a little higher than last year. On one side there is a flight to gold for safe haven purposes, and there is increased purchasing by central banks on the other. This triggers gold demand. But the production of gold remains stagnant, hence the prices go up.

We are inching closer to Diwali festivities. What is the gold demand outlook?

People will buy because of the festivals, for sentimental purchases. But not as much as they did last year. Incomes have not gone up this year.

The regular purchases will continue. For the next one year, IGPC believes, investors can buy from current levels and hold for one year, which should give an upside of another 10-20 per cent from here, if we believe in the logic and argument we discussed.

Should buyers opt for gold ETFs?

ETFs are good. But amid increased uncertainty, the wise investor would probably also have some physical gold. Because ETFs themselves don’t hold all that physical gold.

If there is a rush for redemption, demand for gold will go up and ETFs will have to arrange it. If the uncertainty goes beyond a certain point, one should have a certain portion of physical gold. There can’t be a single prescription for everyone. But retail investors aren’t advised to get into ETFs at this point of time. In more normal times, ETFs are a good way to have an asset allocation.

India is among the top gold consumers, but why does it still have no say in global prices?

That’s because we don’t have a spot exchange. Here, every city determines its price and that price is not transparent, as a few people sitting in different cities set it.

There is no single price that everyone can point to. One of the reasons why China has been able to create a strong gold-based industry is that it has a successful spot gold exchange operational for about 15 years. That has allowed it to create the Shanghai Gold Benchmark Price.

Published on September 13, 2019

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