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Gold may rise more on central banks' accelerated investment programmes

Investors' enthusiasm continues with 5% in Q3, over 16% YTD returns in rupee term

Dilip Kumar Jha  |  Mumbai 

Gold price is likely to go up further on continuation of expansionary monetary policies by central banks of all major economies around the world, the World Gold Council (WGC) said in its third quarterly review.

By the end of September, gold ($/oz) was up 16% year-to-date with two thirds of the gains generated in the third quarter. This performance was echoed in most currencies with returns ranging from 5 -11.1%, using end-of-period gold price data, and 0.7 - 5.2% using average prices. The difference between these two measures reflects gold’s sharp price rise towards the end of the quarter.

In rupee term, however, gold price recorded a jump of 5% at the close of Rs 30,117 per 10 grams on September 28. The average quarterly price at Rs 29,302 per 10 grams, however, showed a jump of 4.6% for the quarter ending September 30.

“The backdrop of negative real yields, a slow recovery and a likely continuation of expansionary monetary policies – with all the risks these present – provides further support to the long-term strategic investment case for gold,” the WGC note said.

Most central banks currently view their country’s economic state as unacceptable and have acted to accelerate the economic recovery. However, there are many obstacles facing developed countries that will force central banks to continue their unconventional monetary policies. In the US, the Fed is motivated by the ailing labour and housing and would like unemployment and inflation to be closer to normalised levels. The market expects partial normalisation to begin around mid to late 2014, though if Japan were to be used as a guide, a prolonged period of subpar performance may lie in store. BoJ’s policies have set a precedent in unconventional monetary policy duration as they are now in their 12th year. The European Central Bank (ECB) is caught between regional recession coupled with fiscal austerity and a prolonged period of intervention before growth and price stability are restored to a consistent path.

Exchange rate shifts had a notable impact on some key regional gold prices. During the first half of the year Indian rupee depreciation caused the local gold price to breach a key psychological threshold, generating the strongest return of the 19 different currency-denominated gold prices monitored by the WGC. That currency weakness reversed in the third quarter, leading to a modest return of 5% for gold in rupee terms. Consequently, the year-to-date performance of the rupee gold price ranked only 11th (+15.7%) as of the end of Q3. As Chart 1 illustrates, gold’s strong performance began in earnest only in the latter half of August. The first few weeks of the quarter had been quiet for gold as well as other assets.

For gold, as for many other assets, central bank policy announcements and actions in late August and early September created a catalyst for price activity. It is critical to note that while gold prices react to monetary policy developments, they are more generally determined by a geographically and thematically broad set of factors. A number of positive gold-specific developments also took place in Q3, including the IMF’s reporting of central bank purchases of gold by Russia, Turkey, Ukraine and the Kyrgyz republic. Just before the start of the third quarter, Turkey announced that it had raised to 30% the proportion of gold held by commercial banks as capital requirements. This requirement will likely boost demand as Turkish commercial banks use gold as part of their capital portfolios.

The key developments in Q3 were undoubtedly the series of declarations by central banks to expand their unconventional monetary policy programmes (UMP). Weak global macroeconomic data during the preceding quarters had created expectations among investors of further stimulus from major central banks. However, policy meetings were not scheduled until the latter half of Q3; thus, positioning for outcomes was kept on hold in anticipation of announcements. In addition, a concomitant slowdown in both India and China had also raised hopes that the Reserve Bank of India (RBI) and People’s Bank of China (PBoC) would act, fiscally or monetarily, to support their economies. Similar sentiment had been expressed in Brazil and South Korea, the note said.

By the final week of August, the Federal Reserve (Fed) extended its quantitative easing programme to an open-ended run rate of $40bn per month. The ECB announced a new bond buying programme named “outright monetary transactions” (OMT), and the Bank of Japan (BoJ) announced a boost to its asset purchase programme, surprising by doubling the size of earlier extensions. Also, China launched a new infrastructure-spending programme to the tune of $158bn, and India had vowed to lower its barriers to foreign investment.

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First Published: Thu, October 18 2012. 19:34 IST