Gold prices a headwind for consumer, but demand to stay firm: PR Somasundaram

On the back of coronavirus fears, we are seeing investors fleeing to a lot of safe haven assets such as gold. Do you reckon that after soaring to seven-year high, there is more room for upside?
Well, this is precisely the role gold plays; when there is a lot of uncertainty people turn to gold because it is a safe haven asset. We have seen central banks continue to buy gold. In the last two years, they have been buying upwards of 650 tons including the Reserve Bank of India. Institutional investors around the world, not so much in India and China, have turned to gold. It is a great diversifier and the returns have been pretty decent in the last few years. If you take India itself in the last 15 years, gold has returned about 9% return. There is a lot of momentum in this price rally but we have to be cautious that a lot of what is happening has to do with anxiety. As and when clarity emerges, the momentum will not be the same and that is the beauty of gold. Interest rates, strategic factors and also certain short term anxieties play a part in gold’s movement.

Where do you see gold prices headed in the near term?
As you know we do not forecast prices but let me tell you the gold price movement is not just on the recent coronavirus issue. Gold started moving up from July last year, driven by the US interest rate scenario. And then issues about the global growth scenarios came in and central bank buying also added to the momentum again, and these were the various factors that have contributed to this rally.


The recent anxieties have added to this but they are not the only reason. There are several factors which are fundamentally in favour of gold, and primarily it is the US interest rate scenario. The amount of sovereign debt which is in the negative yield territory touched $16 trillion and now it is estimated at around $12 trillion. This again makes it easier for people to put it in gold rather than these instruments. So a lot of factors which are structural in nature are favouring gold price rally. It is not just this news about coronavirus, it is just a very recent phenomenon and it may not even hold out in the long term.

There is a perception that aggressive policy easing measures taken by China to shore up the economy, will limit upside for gold. What is your sense on that and what do you expect the US Federal Reserve will do in terms of interest rates?
Well, there is already one more rate cut factored in the price but it is not just about the virus. The impact of the virus will be a low global growth and that is what is making people move to gold. And the loss that we have incurred is not going to disappear; it will take quite a few quarters if at all to catch up. To that extent, some of the rally will remain. We do not forecast prices but as we look at the factors that are driving the price, I do not see any short term reversal of these factors.

How soon and to what extent do you see gold moving in the next few months or a year?
The Indian demand is driven mostly by weddings and jewellery demand is about 80-85%. I do not think you can take that away totally. No matter what the price is you cannot remove their buying but it certainly will phase out. The important thing is we will see a slowdown immediately because the consumer demand does get affected. Last year, for instance, if you see the ETF inflows were the highest at 400 tons but if you see consumer demand across India and China, they were both lower. China was down 15% while India was down 9% in volume terms but in value terms, we still saw growth. India invested more than 3% in value terms in gold but they got less gold because the price was higher. So that is the trend you will see. These price increases are headwinds for the consumers in the short run but this demand does not disappear because this has a lot of cultural and other factors as well. The one good thing is to see with the rise that we have seen in prices if we could develop the investment side of the market in India, which is very underdeveloped. This would lead to gold in circulation which is what the government wants.