By K Raveendran
The pullback in gold prices has generally been attributed to investor caution surrounding the Federal Reserve’s interest rate strategy and other economic cues, but the immediate trigger is believed to be the US debt deal, which averted a default, thereby lowering the risk perception. Gold soars when risks intensify.
Gold prices in the Indian market declined by Rs 420 to Rs 60,380 per 10 gram in the national capital on Thursday amid a fall in prices of the precious metal overseas. This was followed by a marginal increase of the next day, but the overall trend has been downward.
Gold fell nearly one percent in May, but currency moves were a prominent factor and outside of the US and Canada, gold saw gains. According to World Gold Council, prices also remained range bound, having failed to establish a foothold above the psychologically important US$2,000 level. It appears that over the past year, gold has been more influenced by the US dollar than on average.
The deal struck between Democrats and Republicans in the debt-ceiling saga has had a negative impact on gold, with lessened risks. But the council’s reading is that the partisan wrangling until the 2024 elections should offer more support gold. The default threat in 2011 had, in fact, helped the yellow metal.
The immediate reaction of the debt ceiling deal struck in 2011 had reverberated through markets quite violently, partly on a downgrade of the US’s credit rating and partly from the economic weakness that was expected to materialise. The current deal has been touted as a positive in that it avoids a cataclysmic default and has so far elicited a positive reaction from equities and other risk assets. But, according to the council, these remain in a fragile state. A 2023 recession continues to be a strong possibility and politics are unlikely to get friendlier as we approach election season in the US.
There has been a remarkable about-turn from central banks, which was primarily on account of Turkey offloading, as the very strong gold demand in Q1 was to a large extent on the basis of central bank buying. The council attributed the Turkey action as a specific response to local dynamics rather than a change to their long-term gold policy: the gold was sold into the domestic market to satisfy very strong bar, coin and jewellery demand following a temporary partial ban on gold bullion imports. The other sellers were Kazakhstan, Uzbekistan and Kyrgyz republic.
Purchases were comparatively smaller. Four central banks reported an increase in their gold reserves, with the largest purchase coming from Poland. The People’s Bank of China continued its recent run of buying – now six consecutive months – lifting its gold reserves by 8 tonnes to 2,076 tonnes, which represented 4 percent of its total reserves). The Czech and Mongolian central banks also made purchases.
Jewellery was relatively flat in the first quarter. Chinese demand regained ground, reaching 198t in its first quarter of unfettered consumer activity since lockdown restrictions were lifted. This offset weakened demand in India, where consumption fell by 17 percent year-on-year to 78 tonnes in Q1 2023. The sharp increase in domestic gold prices was the primary factor impacting purchases.
In value terms, Indian demand dropped by 9 percent in rupee terms to Rs 562.2 crore in the first quarter, compared to Rs 615.4 crore in the same period last year. In dollar terms, the demand has tumbled to $6.8 billion, as against $8.2 billion in Q1 2022. Barring the pandemic, this is the fourth time that first quarter gold jewellery demand in India fell below 100 tonnes. This has been attributed to the sharp rise in gold prices and volatility combined with fewer auspicious days to trigger consumption, with many households deferring buying perhaps in anticipation of a downward price correction.
Investment demand was a chequered landscape in the first quarter. Renewed gold-backed ETF inflows in March, driven primarily by systemic risk in the US economy, partially countered outflows in January and February and helped bring quarterly outflows down to a modest 29 tonnes.
Despite sizeable net selling from gold reserves in April, the council expects the central banks to remain net gold purchasers in 2023. (IPA Service)
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