“Gold’s father is dirt, yet it regards itself as noble” So goes a Yiddish proverb. Trouble is, it has not lived up to the proverb’s meaning: gold, like other commodities, has taken a beating over the past month.
Unlike many commodities, it has few industrial uses. A big chunk of demand is for investment. Gold held in exchange traded funds — a typical investment instrument — has fallen 40 per cent since a 2012 peak.
The recent gold price fall means more trouble ahead for gold miners. The all-inclusive cost to produce gold is about $1,100. If gold prices fall below $1,000, some gold reserves (assets) would be unprofitable to recover and need to be written down, putting pressure on the more indebted miners.
Gold cannot fall forever. Even so, listed gold miners should at some point be cheap. One early buy signal is when it costs less to buy mines on the stock market than to build them. Building a gold mine from scratch can be measured, crudely, by the cost of the investment (including debt) an ounce of gold produced. An average new mine would cost $2,500 an ounce of annual output, estimates RBC. Yet the larger listed gold miners still have an average enterprise value to production of $3,600.
More traditional valuation metrics tell a similar story. Despite the precious metal’s fall, the two largest miners by market value, Barrick Gold and Newmont Mining, still trade at double their forward price earnings multiples of two years ago.
Even if gold prices keep falling, it is far too early to sift the dirt for glitter.
India’s gold imports shot up by about 61% to 155 tonnes in the first two months of the current fiscal mainly due to weak prices globally and the easing of restrictions by the Reserve Bank of India.
In April-May of the last fiscal, gold imports had aggregated about 96 tonnes, an official said. In the international market, gold has been trading weak over the past few months. On Friday, it closed at $1,095.10 in New York market.
India is the largest importer of gold, which mainly caters to the demand of the jewellery industry. Large imports of gold impact the country’s current account deficit, which occurs when value of import of goods and services is more than its exports.
The CAD in 2014-15 shrank to 1.3% of GDP ($27.5 billion) from 1.7% ($ 32.4 billion) in 2013-14. The RBI and the government have maintained that the CAD level is comfortable.
In November last year, RBI had scrapped the controversial 80:20 scheme. Under the programme, which was put in place in August 2013 to keep a tight leash on gold inflows, at least 20% of imported gold had to be exported before bringing in new lots.
In 2014-15, India imported 915.54 tonnes of gold as against 661.71 tonnes in the previous financial year.
– Russia adds another 800,000 ounces or 25 tonnes to gold reserves in June – Russia’s has sixth largest gold reserves in the world – Allocates 13% of FX reserves to gold – Central bank buys all Russian gold production – Other Russian gold demand imported – If billionaire oligarchs diversify into gold, prices will rise sharply – Russia views gold bullion as “100% guarantee from legal and political risks”Read more ›
– Bloomberg Intelligence suggest gold-backed yuan see gold at $64,000 per ounce – “Chinese gold standard would need a rate 50 times bullion’s price” – As China-U.S. relations deteriorate, gold-backed yuan possible – Dollar and financial and monetary dominance of U.S. at risk – U.S. and China war of words continues to escalate – China rejects U.S. hegemony in Southeast Asia – Currency war to escalate
If China were to partially back its yuan with gold it would require a gold price of $64,000 per ounce, 50 times gold bullion’s price today, according to a recent article from respected Bloomberg Intelligence.
It seems like an outlandish forecast. However, as tensions between the U.S. and China continue to escalate such a scenario is not actually as implausible as it may first appear.
If China were to back its yuan with gold it would require a price of $64,000 per ounce according to a recent report from Bloomberg.
Citing former US Federal Reserve Chair Alan Greenspan, Chinese economic observer Jin Zihou suggested that the Chinese renminbi would deal a lethal blow to today’s financial system if Beijing converted its $4 trillion assets into gold.
Since the US dollar’s power is gradually fading, China, the US biggest creditor, may potentially destroy the US dollar, Jin emphasized.
Still the US dollar remains the “biggest player,” accounting for 60 percent of global reserves. However, many countries are seeking ways to limit the power of the US dollar and become less dependent on it.
According to Jin Zihou, the only way for Beijing to end the US dollar’s reign is to accumulate a significant amount of gold, namely 30,000 tons. In this case, China will be able to challenge America’s longstanding dominant position in the global trade and financial markets.
Remarkably, Alasdair Macleod, a researcher and former Executive Director at an offshore bank in Guernsey and Jersey, pointed out that between 1983 and 2003 China could have secretly accumulated almost 20,000 tons of gold.
In Mumbai Customs lingo, ‘Dhanalakshmi’ or ‘Kuber’ aren’t gods their officers propitiate or horses they bet on at the city’s famous Mahalaxmi racecourse. ‘Dhanalakshmi’ is the code for the Emirates flight EK500 from Dubai to Mumbai while ‘Kuber’ refers to Air India’s AI 984 which flies the same route. Officials say these are the flights used most often by gold smugglers.
According to Customs officials, ‘Dhanalakshmi’ alone accounted for 72kg of seizures in 2014-15 — almost 8 per cent of the 943kg seized at Mumbai’s Chhatrapati Shivaji International Airport, a record for the last three years and a 173% hike from the previous year.
But countrywide figures show that Mumbai is just one of the many landing grounds for these smugglers. Officials and industry insiders attribute this spike to a “high” import duty of 10 per cent from 2013, a booming demand pegged by the World Gold Council at around 840 tonnes in 2014 – 191.7 tonnes in the first quarter of fiscal 2015 alone, up 15 per cent from the same period last year — and a low prosecution rate of those caught smuggling gold.
This spurt since 2012-13 is most visible in seizure figures over the last three years at India’s two busiest international airports handling roughly 30,000 international passengers each every day — 64 kg to 943 kg in Mumbai and 6 kg to 574.81 kg in Delhi (see bar graph).