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“After a dull year for gold in 2000, the chances of something more exciting happening in the market have increased because of the radical change that is now taking place in the financial and economic environment,” forecasts the Gold Fields Mineral Services Ltd (GFMS) in its Gold Survey 2001.

The probability of gold moving out of the narrow $256-273 trading range experienced in the first quarter of 2001 has certainly grown. On balance, and assuming the slowdown in the US and world economies does not spill over into a full-blown financial crisis, the risks are more to the downside,'' GFMS pointed out. The scope for a dramatic investor-led recovery in gold prices was arguably greater now than it has been for a number of years, even if at present the odds are still against such an outcome, it said.

Gold Survey 2001 estimated that total imports into India fell for the second year running. Open general license (OGL) imports declined by over 7 per cent year-on-year, to around 525 tonnes, but a sharp rise in replenishment and unofficial shipments partially offset this, leaving total imports down by under 2 per cent, the report said. Changing patterns of urban demand, coupled to weak rural offtake caused by lower agricultural growth, contributed to the decline, GFMS reasoned, adding that while it may not be possible to categorically assert a decline in imports, a decline in OGL imports suggested that the market was weak. Trade routes into India were complex but can be divided into two distinct categories - direct flows in the main from the refining centres of Europe, South Africa and to a lesser extent Australia, and indirect flows which tended to move through the two entrepots of Singapore and Dubai in the first instance, the report noted. Smuggling continued into India because of the high level of import duty (of around 9 per cent), coupled with additional charges such as sales tax and octroi imposed by local Governments. Roughly, the combination of these taxes meant that smugglers had been able to extract gross margins of anything upto 13 per cent. Recently, customs duty on gold import was reduced from Rs 400 to Rs 250 per 10 g as a result of which there has been a sharp fall in unofficial activity, but what its impact would be on the overall picture in 2001 remained to be seen.

Analysts believe that gold is now benefiting from forming a good base above $262/oz and with sustained high lease rates discouraging forward selling from producers and speculators. After a good close to the week, and see further gains in the short-run. The World Gold Council reported last week that Governor of the People's Bank of China had confirmed that China would launch its first gold exchange in Shanghai in the second half of 2001. Producers will be allowed to sell directly into the market, while retailers, wholesalers and processors will no longer have to apply for licenses for gold transactions. Apparently, China will also gradually relax restrictions on gold imports along with the country's foreign exchange reforms, but no time scale was given for this, the analyst said.

The analyst predicts weakness during the first half to three-quarter of 2001 for a variety of reasons. These include soft physical demand resulting from global economic slowdown which is not conducive to jewellery sales, with demand in the US, East Asia and Europe likely to be most affected; perceived resilience of the dollar; and large central bank gold sales (close to 600 tones last year). In addition, revival of producer hedging due to a relatively neutral outlook for gold; renewed interest in speculative short-selling due to the modest gold price outlook and a technically weak picture; and liquidity in the gold lending market have been cited as reasons. Towards the end of the year, there could be optimism on gold prices as physical gold demand could begin to improve in line with the recovery in the global economy as well as the much hoped-for gold promotion; selling pressure eases from speculators and producers; the dollar weakens due to low US interest rates, a softer US economy and a mixed equity market performance; and revival of inflationary concerns due to lower US interest rates and a recovery in the US economy.

Aru Srivastava

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