Why gold prices have cooled just before Akshaya Tritiya

It’s believed that Akshaya Tritiya – which is on May 3 this year – is so auspicious that the valuables you buy on the day would remain ‘Akshaya’ – indestructible or inexhaustible – in value. This unbeatable idea makes Indians buy gold in massive amounts on the day. And the prices of India’s favorite precious metal have dropped sharply in the weeks leading up to the day.
Spot prices of the purest (24-carat) variety of gold have dropped by more than 5% in Ahmedabad over the past three weeks to just above Rs 51,000 for 10 grams (a tola) at the end of May 2. It’s more than a tenth off the high it struck on August 7, 2020. Gold futures, for deliveries 6 months down the line, als o dropped 0.88% on the Multi Commodity Exchange the day before Akshayaa Tritiya.
What explains these lacklustre prices of the lustrous metal right at the time demand is expected to rise in one of its biggest markets?

First came a price rise in early 2022
Gold demand is driven by four kinds of buyers – those who buy for investment, those who buy for jewellery, technology companies, and central banks.
When Russia’s invasion of Ukraine in February 2022 followed the pandemic troubles of 2021, investors – the largest segment along with jewelry buyers – flocked to buy gold, which is considered a ‘safe-haven’ in troubled times.

Indians parked 27% more in ETFs, or exchange-traded funds that aim to track physical gold prices, in 2021. The Reserve Bank of India reported that in February 2022, India bought double the value of gold it had bought the same month in 2020 , before the lockdowns began.
Global demand also rose by a robust 34% through the first quarter of 2022 over a year earlier, much more than the supply growth of 4%, the World Gold Council revealed last week. ETF holdings around the world jumped 269 tons in the quarter.
Prices in India rose by more than a tenth in Ahmedabad from the beginning of the year up to March 8. Then the sheen of surety wore off as competing worries clouded the outlook.

Competing worries keep prices wobbly
A few drags on the prices were already discernible early in the year. Demand for jewelry was 7% lower in the first quarter, with most of the fall coming from China and India, the biggest buyers. India’s jewellery market dropped sharply by a quarter.

The World Gold Council estimated that excluding these two markets, jewelery demand in the rest of the world grew 7% in January-March 2022.
The trouble in China – which bought a third of the world’s gold jewelry in 2021 – started in March 2022. After an initial buoyancy, demand came to a virtual halt when the government started imposing strict lockdowns in its cities to contain a resurgence of Covid cases.

China’s demand for bars and coins dropped too, taking a fifth off the global demand for those investments. Demand from technology companies, mostly in electronics and communications, was almost at a standstill.
On the supply side, the world kept a wary eye on Russia, which produces almost a tenth of the world’s gold.
The volatile prospects of the inflation-inducing crude oil prices – rising and falling to the drumbeat of war, economic sanctions against Russia, and weak demand in China – kept gold prices on a rollercoaster from mid-March to mid-April.
Other worries are looming larger now. In February, some of the world’s most central banks started signaling clearly that they would fight high inflation in their countries with sharp interest rate hikes. The RBI is also expected to raise rates as early as June.
All eyes are now on the US Federal Reserve, whose meeting ending on May 4 is widely expected to raise interest rates in the world’s largest economy. Though inflation in the US has cooled a bit after a four-decade high of more than 8% in March, the Fed is also weaning the US economy off the easy money it had provided during the pandemic. And this rate rise is the biggest worry spooking gold prices at the moment.

Global prices and local worries
However, the relation between gold and inflation in India has changed in recent years, say experts. Its traditional role as a hedge against inflation is not so strong now as it was a decade or so ago. The domestic price of gold is now defined by global prices and the dollar-rupee exchange rate, not so much by consumer inflation at home.
Exchange rates are a clear and present worry for other central banks too, who are some of the biggest traders in gold. The RBI’s Monetary Policy Committee noted early April: “The cost of foreign currency debt for an emerging market is rising and on the other, they are forced to drain currency reserves in order to shore up exchange rates.”
A strengthening dollar may force some countries to sell their gold to shore up their exchange rates.
Central banks bought a net of 84 tonnes in the first quarter of 2022, which is almost 30% lower than a year ago. Though the RBI’s gold reserves grew in 2021-22, buying by India, Egypt and Turkey was offset by heavy selling by the likes of Kazakhstan, Uzbekistan and Qatar.
Given that debt and exchange rate pressures in poorer countries and interest rate worries in richer countries are likely to persist through 2022, the competing tugs on gold prices will remain real through the year.
So should you buy gold?
Those seeking answers today would do well to take lessons from a long view of the past.
The world was worrying about similar pulls and pressures in 2010 too, when inflation was troubling some just when they were coming out of the so-called Great Recession of the late 2000s.
So, how much would you have made now had you invested Rs 100 at the beginning of 2010 on Sensex stocks and on gold? The plotted result, though smoothened out a bit by monthly and quarterly averages, show that the recent spurt in the Sensex would have given stocks slightly higher returns than gold during this period. As the chart shows, the conclusion would be quite different if we shifted the time window a bit.
So it’s worth remembering this Akshaya Tritiya that markets or instruments aren’t ‘Akshaya’ by themselves, it’s how we time them that matters.

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