At below $1,600 an ounce on Friday, prices are down almost 3% in February. The fifth straight monthly drop is gold's worst run since 1997. Gold peaked to $1,921 in September 2011. If you have been following gold's progress (and in India, who doesn't), this unexpected change raises two questions. One, since jittery investors seeking risk-free assets love gold, do falling gold prices mean a rising world economy? Two, is it a good time to buy? The short answer to both is no.
It is true that the global economy is no more in the same dire straits. But that is not why gold is down. Gold is declining because physical demand is desultory. Indian and Chinese women together bought one out of every two pieces of the jewellery worth more than $100 billion sold in 2012. When jewellery goes beyond their reach, the market impact is instant.
Currently, Indian jewellery buyers are getting the thick edge of the wedge. As if the high prices were not enough, the government is doing everything it can to curb import. In 2012, we bought 12% less than the previous year. Sales won't become too brisk in 2013. At best, we will make good the decline. China isn't faring much better. Demand was stagnant in 2012 because of the overall economic slowdown. February's Lunar New Year holiday sales were dull. 2013 will continue in the same vein. South Korea, Vietnam and Thailand all bought less. Western consumers are not even thinking about jewellery. Only the Russians seem in the mood to splurge.
But isn't gold supposed to act like some supranational currency, whose value is decided by many more factors beyond jewellery demand? The Chicken Littles who believe gold will be their final refuge when the sky falls are indeed investing in it as a currency, salting away bars and coins on paper or in physical form. However, they too bought less in 2012. There are no imminent financial disasters in 2013.
Even if these investors were buoyant, jewellery is still the world's favourite way to show its faith in gold. So, when jewellery sales fall - for whatever reason - gold prices have to retract till they are back on track. Investor and central bank purchases are still not large enough to pick up the slack.
This is exactly what's happening now. Gold generally earns returns only through price gains. Punters are stampeding for the exit because they foresee another dull year. Billionaire George Soros cut his holdings by half in SPDR Gold Trust, the biggest fund backed by the metal. John Paulson, the single largest investor in SPDR, is reportedly sitting on about $250 million in paper losses. Subdued prices have forced top gold miner Barrick Gold Corp to cut production by more than 10%. Prices will continue to correct until they reach a level where consumers come flocking back.
This brings us to the question of whether it is a good time for you to buy. Well, not if you are paying in rupees. Quite often, when gold dips in dollar terms, the rupee also becomes weaker against the dollar. So, what we stand to gain on the swings, we lose on the roundabout. Gold is still around Rs 30,000/10 gm due to the rupee effect. Actually, the weaker rupee is an important reason why we have been paying through our noses. If you compare gold prices in October-December 2012 with the same quarter in 2011, the sharpest increase -- 9% -- is in rupee terms. In dollars, the rise was only 2%. In British pounds, you would have found no change in prices at all!
Gold has had a winning streak for the last 12 years. But like all commodities, its price is a factor of demand and supply. Gold prices went too far ahead of demand. They have to slow down till demand catches up. Once the two are in tandem, the party can start again. Though only if you live in New York. For shoppers with rupees in their wallets, the party may be over for ever.