Gold prices looking for a breakout?

The hurricane / cyclone season in the US extends from June 1 till November 30. Probably, the 2019 monsoon has seen the advent of a cyclone season in the Arabian Sea.

The delayed monsoon was heralded by cyclone Vayu and the departure by cyclone Hikka. Then, currently we have seen almost two simultaneous cyclones Kyarr and Maha that were swirling in the Arabian Sea. Likewise, rumours are swiftly engulfing global markets recently.

Firstly, we had the rumour that ISIS chief Baghdadi had been killed by US troops. Then, there were rumours in the Indian gold markets that an amnesty scheme for gold to flush out black money was on the anvil and likely to be unveiled soon.

Finally, there is also a rumour that China had a secret gold backed crypto currency up its sleeve to destroy the value of the US dollar. While the Baghdadi rumour has since been confirmed, the other two rumours have stirred a storm in the gold markets.

But, as of now they are still classified as rumours. Seemingly oblivious to the happenings around it, the gold price vacillated in a $20-30 per ounce range in the last fifteen days, neither did gold get buried below the $1,500 per ounce mark nor did it break free and march ahead towards its stated goal of $1,600 per ounce mark before the year end.

The yellow metal closed at $1,508.80 per ounce in London (pm fixed) on Friday (1-11-2019). However, in New York the closing was much higher around $1,515 -1,516 per ounce mark.

Elsewhere, the gold price continued to be swayed in a $20-30 per ounce range by tugs and pulls in the global markets. US market data, the US Fed rate cut (that pulled gold out from below the $1,500 per ounce level), Brexit, the possibility of Trump’s impeachment, the trade war (with both parties sending contradictory signals) and geo-political tensions all add to the ecosystem around gold.

Meanwhile, the news that the government would introduce a new gold amnesty scheme caused great excitement in the bullion markets in India. However, many were of the view that it could be only a motivated rumour floated by some vested interests in the industry.

Or else, even the government could be testing waters to gauge the mood of the consumers towards such a scheme. But, looking at the history of past amnesty schemes one is doubtful if such a scheme would work in the present day scenario.

There is hardly any point to introduce a new scheme just because the Sovereign Gold Bond and the Gold Monetisation Scheme have not given the desired results. The need of the hour is to revamp both the GMS and the SGB by having a proper interface between the consumer/customer and the government.

At present, there is no one to bring the buyer of gold bonds or the subscriber to the GMS to the designated banks. The onus is on the banks to get an approved refiner/hallmarking centre to certify that the gold is of stated purity in the case of GMS.

In the case of the SGB, the banks just put a notice about the SGB inside the bank and there is a notification by the RBI regarding duration of SGB scheme and its price.

There is little or no marketing for both these marquee schemes of the government. No wonder, while the SGB has garnered bonds worth around 20 odd tonnes of gold the GMS has garnered just around 6 tonnes of the yellow metal.

What must be understood is that the customers are much more comfortable in buying, selling and even pledging their gold with jewellers, scrap dealers, refiners and even NBFCs who lend money to customers against their gold.

They are apprehensive about harassment by authorities once they subscribe to the scheme. Then, the consumer too is wary of parting with his gold for testing of purity under the fire assay method wherein the piece of jeweller is destroyed. What is required is a non destructive method to find out the purity of gold.

The schemes need to be up and running and not bogged down by rigid parameters. If some such players in the industry are authorised to get gold under GMS, they should be incentivised for getting customers. Probably, give them a portion of the gold collected under GMS on loan for their requirement.

There is no point in waiting for a utopian perfect scheme. Then, the SGB needs to be an ongoing scheme open at all times with a thriving secondary market. This scheme has to be marketed and incentives given to get subscribers under the SGB.

Finally, the rumour about a secret gold backed crypto currency from China seems akin to a Chinese puzzle. It could add another dimension to ongoing never ending US-China trade war. It already has contours of bygone era US-Soviet `Cold war’.

A statement apparently made by a Chinese official that there can be no lasting agreement with the US under Trump. It the trade dispute intensifies into a cold war that could mean more retaliatory tarrifs and therefore a boost to gold prices. So sweet music for gold!

The author is an independent analyst of precious metals and diamonds, who has worked with GFMS and WGC.