Fool's Gold

The fall in gold prices will help bring down India's current account deficit.
 Mahesh Nayak        Print Edition: May 12, 2013

Vinayak Vani from Mumbai is probably kicking himself for buying gold on Gudi Padva, the Maharashtrian New Year on April 11. If he had waited just a couple of days, he would have forked out a lot less money. The reason? Gold prices slumped over 12 per cent in the three days after he went shopping.

The metal tumbled after news that the Cyprus government planned to sell some of its gold reserves to raise e400 million to fund its bailout. Fears of further central bank gold sales in the eurozone following the Cyprus proposal sent the metal tumbling on the London Bullion Market to a 26-month low of $1,321.50 an ounce on April 15 from $1,565 on April 11. Between them, Portugal, Ireland, Italy, Greece and Spain hold more than 3,230 tonnes of gold worth nearly e125 billion. "Concerns that other European governments, especially Italy, may take similar steps like Cyprus created panic in the market, with players offloading their gold positions," says Naveen Mathur, Associate Director (Commodities & Currencies) at Angel Broking. "Italy holds over 2,000 tonnes of gold. If it even plans to sell half its holding, it would be close to what India buys in a year."

The sell-off in the international market had an impact on the Indian market. Gold futures for June 2013 on the Multi-Commodity Exchange lost 12 per cent to Rs 25,634 per 10 grams on April 15 from Rs 29,184 grams on April 11. In the three months before the fall, gold was trading in a narrow range of Rs 29,000 to Rs 30,500 per 10 grams. "Unless there is renewed central bank buying globally the upside may be fairly limited from here onwards," says Vikram Dhawan, Director at Equentis Capital, a UKbased investment analytic and advisory company. "If we don't see an aggressive bounce back, there is a genuine risk that we may enter a multi-year bear market although a total collapse in prices may be prevented due to jewellery demand from emerging economies, especially India."

The fall in gold prices could not have come at a better time for India. Lower crude oil and gold prices will help bring down the current account deficit (CAD) - excess of imports over exports plus remittances - which will improve the country's investment rating. A wide CAD is a sign of economic weakness as it means the country is a large debtor.

And while Vani may have made a notional loss on his purchase, the weak market sentiment will give him an opportunity to do some value buying in the days to come.

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