Pakistan’s gold balloon bursts

Falls to Rs196,000, a drop of Rs14,500 from record high of Rs210,500

KARACHI:

The massive devaluation in the rupee-dollar exchange rate ballooned the gold pricing bubble by Rs40,000 per tola (11.66 gram) in a short span of 45 days and it burst at Rs210,500 in late January 2023. While the short-term outlook stands positive for the rupee, it suggests otherwise for the yellow metal. Gold was priced at Rs196,000 per tola on Saturday, indicating a drop of Rs14,500 compared to its all-time high at Rs210,500 on January 30, 2023.

To recall, gold appeared the most preferred asset in 2022 in Pakistan – it offered a return on investment (profit) of 41% in the year and people parked their savings in its safe haven to shield themselves from the devaluation in the local currency. While investors would earlier invest in US dollars, they switched to bullion after the foreign currency disappeared from markets.

AA Gold Committee Director Adnan Agar said, “There are mostly short-term traders in almost every asset in Pakistan,” implying that they play in one commodity for a brief period of time and switch to another one. “Gold may not recover to its all-time high hit at Rs210,500 in the short-run,” he said.

Speculators had taken position in gold when it was on the rise; a majority made money and quit, but still, several investors bought gold at over Rs200,000 per tola and still hold that. “They will not sell in loss, and will opt to hold position in wait for a good future price.”

After the IMF resumes its programme and other multilateral and bilateral creditors unlock new lending, “Gold may recede to Rs170,000-175,000 per tola if the rupee regains to Rs240-250 against the dollar in the interbank market over the next two to three months,” he said.

Pakistan has been tasked to gather $4-5 billion in new financing from creditors and friendly countries before the end of the current fiscal year, on June 30, 2023, so that its foreign exchange reserves stabilize at around $8-$10 billion.

The rupee has recovered around 4.2% or (around Rs11) in the past two weeks to Rs264/$ in the interbank market compared to an all-time low at Rs276.84/$ on February 3, 2023.

The short to medium-term outlook for gold in the international market also stands negative, indicating its price in US dollars will remain on the downward side and push local pricing bodies to calculate prices in domestic markets accordingly. The improvement in the inflation reading and unemployment rate in the US may also push the Fed to stop increasing its key policy rate and resume cutting the policy rate in six months. “The developments will not allow gold to shine. Its price may go up close to $1,900 per ounce (31.10 in two to three weeks), but slip below $1,800 in three to four weeks,” he explained.

The downward trend in gold in the global market will continue to dominate local pricing methods.

The pricing body usually considers three things to calculate the price of the imported commodity for local markets including the rupee-dollar exchange rate, its price in the global market and its supply and demand in the local market.

“The short-term investors may not generate high demand for the commodity in the near future,” predicted Agar.

He was of a view that “They will prefer to invest in US dollars again as the greenback will be available soon.”

“They will take position in US dollars to avoid devaluation of the local currency, as the rupee may return to its downward trend in six to 12-months,” he said.

In the international markets as well, investors will take positions in the stock market instead of gold when the economy recovers, as they have retreated massively and are offering high returns on new investments. “Equity (stock market) will be a preferred investment asset under the present global environment,” he said.

Published in The Express Tribune, February 19^th, 2023.

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