India's Golden Conundrum

Indian’s love for gold is spiritual where it is revered as God’s currency. It is only astronomically higher prices which can resist them to buy it. Falling prices are just what India wanted at a time when festival and wedding season is ensuing.

The king of metal Gold is again going south. It touched a 14-month low on September 20, 2014. Such a scenario induces people away from gold to flock into financial instruments. The metal will no longer lure Indians is what analysts believe but India’s thirst for gold will take eternity to be quenched.

Falling gold prices might lead people in other countries to ditch the yellow metal but Indian’s love for gold is spiritual where it is revered as God’s currency and people feel proud of owning it. It is only astronomically higher prices which can resist them to buy it. Gold demand slumped magically when import duty was hiked to 10% in order to control current account deficit. Now that prices are falling, it will be seen as an opportunity to purchase it on low in the hope of price-rise. Long-term return outlook of a common investor in India is always bullish on gold.

Current account deficit (CAD) narrowed sharply to $7.8 billion (1.7 per cent of gross domestic product) in the Apr-Jun quarter of FY 2014-15 from $21.8 billion (4.8 per cent of GDP) in the year ago period. The fall was strongly led by slowdown in gold imports which halved to $7 billion in the April-June quarter from $16.5 billion in the same quarter a year ago. However, the gold imports in the preceding quarter i.e. the Jan-Mar quarter of FY 2013-14 amounted to US$ 5.3 billion. 

To compare the two data, gold imports actually risen on quarterly basis. The reason is because RBI had eased some gold-import restrictions in the month of May which instantly drove the people to invest in gold. This uptick in demand is reflected in the gold import data of Apr-Jun 2014.

It is true that the gold investment at this juncture does not seem viable. Gold futures are trading lower. Improving global economy does not bode well for the metal, to boot. Stronger dollar is also contributing to Gold’s southward journey as gold is used as a hedge against movement in the US dollar, which means its prices will move inversely to change in value of dollar. Indian gold prices move in tandem with global prices depending on rupee’s value against dollar. Since India imports the yellow metal, a weaker rupee cushions a fall in gold price while a stronger local unit makes the metal cheaper. Given improving economic conditions, rupee may not depreciate much against dollar.

That said, why to invest in a declining metal when stock markets are doing well and lower inflation is making returns on savings schemes positive? The answer lies in a trend seen last year. Gold prices had fallen dramatically in Apr-Jun quarter of 2013. Questions were raised if it safe to invest in this yellow metal but coming true to the conscience of Indians, gold hit a record high of Rs.35,074 per 10 grams in August 2013. Hence, it is no hyperbole that Gold is the safest haven amongst all.

With the ensuing festival and wedding season, India’s gold buying binge is likely to be bumper. Low prices at this time are just what India wanted. Irrationally higher import duty had enforced them to stay away from the metal for long but now is the opportunity to buy it on dips. Thus, India’s golden problem is not yet resolved and it is too early to claim that the country’s CAD is normalized. India’s lure for gold can be suppressed but cannot be died in any case. 

Too early to bet big on markets

A reality check of current market conditions sparks good reasons to stay cautious while boarding the bus of current market rally.

Splendid times seem to have unleashed in Indian stock markets. Nifty touched a lifetime high of 8000 on 1 September and Sensex hit 27,225.85, an all-time high on 3 September. Nobody had the foresight to predict such levels for benchmark indices a year ago. But now, our fortune tellers aka technical analysts are certain that the bulls will ride faster and farther from these levels in the days to come.

For Navneet Munot, CIO, SBI Mutual Funds, Sensex hitting 10,000 in 10 years is not unrealistic if India Inc can deliver growth of around 15 per cent per annum, which, according to him, is not an unreasonable expectation over a long period.

However, taking these predictions with a pinch of salt is advisable for retail investors as their hard-earned money is involved. Their predictions might be true but a reality check of current market conditions sparks good reasons to stay cautious while boarding the bus of current market rally.

Needless to say domestic as well as foreign investors are betting on Prime Minister Narendra Modi-led NDA government which has successfully trumpeted its reform-oriented approach in every nook and corner of the world.

Now is the time to analyze whether the positive sentiment lurking around is hope driven or solid result driven. Looking at contracted July IIP data at 0.5% versus the 3.9% of June (revised higher from 3.4%) is enough to warrant that it is too early to stake bets on newly formed government. Though CPI inflation mildly cooled to 7.8 per cent against 7.96 per cent in the previous month but food inflation inched higher to 9.42% versus 9.36% m-o-m.

The week ahead is going to be eventful. First, markets will take stock of IIP and CPI data after opening bells tomorrow with simultaneously eying on WPI data expected to be out at noon. They will be taking note of advance tax payment by listed corporate, which is also due to be released tomorrow and will provide clues about Q2 September corporate earnings.

On Wednesday market mavens will eye crucial US Federal Reserve's monetary policy review. Woe betide the markets if Fed goes for an early rate cut as it will make Indian markets vulnerable to FII outflows leading to correction on Sensex and Nifty.

For investors who do not understand technicality of markets, it is sensible to wait for macro data of following months to come which does not reflect the overhang of UPA government’s tenure so that no confusion is felt whether the slowdown is of UPA’s making or NDA’s failure. Let the time confirm if the Modi-driven seemingly impactful India story is a fact or just the work of a fiction.