- Wealth PMS (50L+)
Gold just fell below $1,500, seemingly on news that Cyprus may sell some of it’s gold to finance it’s bailout. Of course that has very little to do with fundamentals, because what Cyprus owns is about 14 tonnes of gold, which is, in comparative terms, tiny. India recently bought 200 tons – around 14 times the total holdings of Cyprus, and that didn’t really do much on the upside of gold.
The chart shows the carnage recently.
Technically, this is a sell. One could wait a week or two to see if the price will recover, but it looks like multiple strong trendlines are broken and the only hope for the metal is above it’s 50 day moving average (currently $1600).
This augurs well for India’s current account, since Gold is our second largest import.
One of the main problems such a fall creates is for companies like Mannapuram and Muthoot that provide credit based on gold collateral. Now, if people believe that the gold is worth less than what they’ve borrowed, they might just choose to default and let the finance companies take the hit.
Those that make jewellery, like Gitanjali Gems or Titan, may be impacted.
The price of gold in India is less than 28,000 rupees for 10 grams, which is not yet 20% off the highs. I own gold (ETF) and it’s time to cut my position down; I’ve been immensely lucky in that I’ve been purchasing since a price of 12,800 or such, but a technical reversal, once it’s confirmed in a couple days, is a sign to exit.
The price of Brent Crude has been coming down consistently. Here’s the chart:
The fall in these two commodities should impact the current account deficit by reducing it.
While this could be true in isolation, we must remember that the Indian current account deficit has only been bridged by capital flows. If the reasons why gold and crude are falling will also lead to reduced capital inflows, the impact will have been fully negated. I’ll have to do a post on that separately.
A lower crude price, however, helps a lot of companies. From the public sector oil marketing giants, to auto ancilliaries to plastic manufacturers, a lower crude price is hugely beneficial.
Another thing that might happen now is that as these commodities lose out, money might finally shift back into equities. I won’t hold my breath for that (it can take years) but some reallocation is already happening in the west, and I wouldn’t be surprised to see markets enjoy this move if it lasts.