Why gold lost ground

The market is betting on growth in the US economy from Trump’s new policies

Gold didn’t have a great year in 2016. Initially spurred by the dovish Fed, negative interest rates in many parts of the world and the EU referendum, the yellow metal soared to over $1,300/ounce, but developments in the later half of the year did not support it.

The yellow metal quotes at $1,135/ounce now, up just 7 per cent for the year. It had hit a high of $1,375 in July (up about 30 per cent from December last year).

Prices took a U-turn in October when positive data from the US started to signal a rate hike by the Federal Reserve. In November, the US Presidential election outcome was also positive for the metal — it rallied about $60/ounce on the day of the election results as Donald Trump, the republican candidate, recorded a surprise victory.

However, contrary to what many expected, the metal could not sustain its gains. In his first address post the victory, Donald Trump delivered a toned-down speech. There was absence of any of his pre-election rhetoric. He, in fact, promised an increase in infrastructure spending which the market took positively. This fuelled a fresh rally in the US dollar and killed demand for the safe haven — gold.

The Federal Reserve’s rate hike in December further robbed the metal of sheen. On December 14, the central bank increased the policy rate by 0.25 per cent on signs of improving economic growth and hinted at a faster pace in rate hikes in 2017.

The US dollar index is at 103 now, up about 5 per cent for the year. The index was at this level last in 2002.

Indian picture

In the domestic market too, investors in gold haven’t made much money. Year-to-date gold returns have been about 9 per cent.

The consumption demand for gold has fallen this year. Higher volatility in price and the government’s crackdown on black money can be cited as some reasons. In the first nine months of the year, the country’s total gold consumption (as jewellery, bars and coins) was 442.3 tonnes, down about 30 per cent from the previous year. Domestic market gold prices were at a discount to international prices for most part of the year. The discount expanded to $45/ounce in July from about $4-5/ounce in January and is at about $2/ounce now.

Investment demand for the metal too was weak. Inflows into the domestic market gold funds dried up during the year.

All the 12 listed gold ETFs together hold about 21.4 tonnes of gold now, down from 25 tonnes a year back. The total outflows were ₹916 crore (till end November). The Centre’s new scheme - sovereign gold bonds, however, found more takers this year, thanks to the carrots — the additional ‘interest’ and the tax benefit.

Not taking into account the one issued last month, the total collection under sovereign gold bonds so far has been equivalent to 10.2 tonnes of gold.

Recycling of gold, however, has seen good action this year in India, according to a World Gold Council (WGC) report.

When gold prices touched ₹3,000-3,100/gram in August, the supply of recycled gold swelled to about 39 tonnes In India, which is the highest since the December quarter of 2012.

New rules

There have been a few new regulations for the gold industry in 2016. In the Budget in February, the government imposed a 1 per cent excise duty on gold jewellery.

But it relaxed the limit in July and said jewellers with a turnover under ₹15 crore will be exempt (originally, the exemption was for jewellers with turnover up to ₹12 crore).

The more important development was the passing of the new BIS Act in March. This gave the government the power to implement mandatory hallmarking of gold jewellery. However, not much development in this regard has happened since.

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