Curious case of bullion: Gold prices likely to stay at current levels, says Mehanti

If US interest rate rises, commodity will come under further pressure.

KARACHI:

Gold prices are expected to remain stable until the end of the current fiscal year, according to Arif Habib Commodities CEO Ahsan Mehanti.

Speaking to The Express Tribune in a recent interview, Mehanti said major consumers of gold, such as India and China, will likely book more orders in case the gold price falls following the appreciation in the dollar’s value.

The precious metal’s value tends to decline if the US currency gains strength. In other words, the gold price is generally inversely proportional to the value of the dollar.



“Gold prices should stay around the current level. However, the policy of the Federal Reserve to increase the interest rate in 2015 will put further pressure on gold,” Mehanti said, while referring to the end of the bond-buying programme by the US central bank that will likely be followed by a hike in interest rates.

From the peak of $1,821 per ounce in August 2011, global gold prices have tumbled to $1,194 per ounce, registering a decline of 34.4% over the last three years.

So if the gold market is highly volatile, as its price trend suggests, why should people invest in gold, and not securities?

“Commodities market is twice as volatile as the securities market. That is exactly why it attracts more investors globally,” Mehanti said.

To make his point, he cites data on gold prices prior to March 2012. With an investment of Rs100,000 in gold during the first month of 2005, an investor would end up with Rs433,800 in March 2012. This translates into a per-annum return of 26.4%, says Mehanti.

The correction in the gold market following March 2012 gave the dollar its newfound safe-haven status, Mehanti says, which had traditionally been reserved for the precious metal.

“The appreciation in the dollar against the yen and the euro is negating the run in the commodities market,” he noted.

Data on international reserve assets proves Mehanti’s point of view. One would expect investors to opt for ‘safe haven’ like gold in the immediate aftermath of the financial crisis of 2008. However, emerging economies like China and India rapidly increased their dollar-based international reserves following the 2008 crisis.

This is why gold constituted less than 2% of China’s total international reserves in 2013. It constituted about 3% of the international reserves held by all emerging economies combined.

“We don’t have a central bank policy for gold investment available for review. I think retail investors usually purchase gold for jewellery in Pakistan. According to our estimate, more than 50% (of gold investments) should be in the form of jewellery,” Mehanti said.

Roughly 10% of the State Bank of Pakistan’s assets consists of gold coins and bullion, according to the central bank’s latest statement of affairs.

His opinion about sustained future demand for gold from emerging economies, particularly India, is corroborated by the latest data released by the World Gold Council (WGC).

July-September 2014 was a subdued quarter for the gold market, WGC reported, as gold demand eased down globally by 2%.

However, Indian jewellery was an exception, as its demand increased 60% to 182.9 tons. “General sentiment among the Indian populace is on the up, aided by confidence in the new government… A weakening of the (Indian) rupee gold price during August and September also supported gold demand to an extent,” the WGC said, adding that the opportunity to buy gold at cheaper prices proved for Indian consumers ‘hard to resist’.

Mehanti says his commodities brokerage handles 10-25% market shares on a given day on the Pakistan Mercantile Exchange (PMEX). Saying that every investor should dedicate around 10% of their portfolio to gold, Mehanti noted that about 60% of his clientele consists of small retail investors.

Published in The Express Tribune, December 6^th,  2014.

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