Diminishing shine: Slim picking as gold prices expected to remain subdued

Value of 10 grams of 24K gold in Pakistan’s market has decreased almost 5% since July.

KARACHI: From the peak of $1,821 per ounce in August 2011, global gold prices have tumbled to $1,169 per ounce, registering a decline of 35.8% over the last three years.

Consequently, gold prices in Pakistan’s retail market have also fallen over the same period, although the decline has not been equally pronounced.

While international gold prices are down by 12% in dollar terms since the end of June, the value of 10 grams of 24K gold in Pakistan’s retail market has decreased by about 5% since the start of the fiscal year.

Similarly, each of the two gold-based mutual funds being managed by Pakistani asset management companies has posted a negative return since the start of the fiscal year. Atlas Gold Fund and UBL Gold Fund have posted absolute returns of minus 7.8% and 8.6%, respectively, since July 1, according to data compiled by the Mutual Funds Association of Pakistan.



And the bad news for gold’s retail investors is that no respite in the price trend is expected in the immediate term at least.

“Gold prices are expected to remain subdued in the foreseeable future,” All Sindh Saraf and Jewellers Association President Haroon Rasheed Chand told The Express Tribune in a recent interview.

Saying that the US economy is stabilising, Chand said the dollar is gaining strength while major commodities like gold and oil are losing their value against the greenback.

Theoretically, the price of gold is inversely proportional to that of the dollar, as it tends to decline if the US currency gains strength.

“I expect the price of 10 grams of 24K gold to hover around Rs38,600 by the end of 2014,” Chand said. He added the precious metal will regain strength after the ‘make-up’ put on the dollar by US policymakers starts wearing off.

Subdued global demand

While there are many reasons for the less pronounced decline in local retail prices, it can be argued that the overall downward trajectory is a reflection of subdued gold demand in international markets.

According to the latest quarterly data released by the World Gold Council (WGC), total global gold demand in the third quarter of 2014 clocked up at 292.3 tonnes, down 2.4% from the same quarter of 2013. In dollar terms, the year-on-year decline in the global demand for gold remained 5.7% in July-September.

Similarly, gold supply in the international market in July-September remained 1,047.5 tonnes, down 7.2% from the same quarter of the preceding fiscal year.

The reduction in both demand and supply of gold in the international market has been accompanied with the flow of recycled gold diminishing to seven-year lows. According to the WGC, the decline in the flow of recycled gold has occurred hand-in-hand with western economic recuperation post-2008 recession and declining average gold prices worldwide.

As for the use of gold in jewellery, data shows 534.2 tonnes were consumed around the globe in the third quarter of 2014. Although it was 4% less than the gold used in jewellery on a year-on-year basis, the WGC says the demand in July-September was ‘marginally stronger’ than the five-year quarterly average of 527.6 tonnes.

There was a marked decline in the retail demand for gold for investment purposes in the last quarter. The demand for gold bars and coins for investment purposes remained 245.6 tonnes, which was down 21.3% from the same quarter of 2013.

In dollar terms, the year-on-year decline in the demand for gold bars and coins for investment purposes was almost 24% in July-September. The WGC says investors continued to digest last year’s price-driven surge in demand for bars and coins, thus causing the year-on-year decrease in the last quarter.

As for purchases of gold by the central banks around the world, WGC data shows they reduced their net purchases in July-September by 9% on a year-on-year basis. In dollar terms, the decline was 12%, as central banks’ net purchases in the last quarter amounted to $3.8 billion.

More than half of the gold added to reserve assets in July-September was bought by Russia, the WGC data shows.

THE WRITER IS A STAFF CORRESPONDENT

Published in The Express Tribune, November 17^th, 2014.

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