In the history of gold prices the world over, gold prices crashed in 2013, after 32 years. Fears that the US Federal Reserve would entirely do away with the economic stimulus abetted this fall. This shocked many, as a common belief was held amongst people that gold prices can only go up. Historically, gold has been considered as a haven of safe investment. Rising inflation, the recession, limited risk-free investment options available in market, and negative real interest rates drove the demand for gold in the last few years.
In 2013, Indian gold investors and consumers were substantially hedged against this fall in gold prices due to the fall in the rupee and the rise of the dollar. The dollar became stronger during the year 2013 on the hope that the US is recovering from the recession, and that a stimulus package is not needed. International gold prices fell from $1675 in December 2012 to $1199 in December 2013, signaling a huge drop of 28% in 2013. The domestic gold prices fell just 3.5% in 2013. The following chart gives an idea of domestic gold prices during 2013. It shows that gold started falling from January 2013 till June 2013. In July 2013, gold prices began to increase, but it again started falling from September 2013. In June, domestic gold prices hit the lowest.
There is an interesting correlation with the value of INR against USD during 2013. As the price of Gold has fallen the INR became weaker. The INR being strong around Rs. 53.74 in May against USD, became weak and reached Rs. 63.78 by September 2013. The period average was Rs. 58.42 per US$. Overall, the currency exchange rates have depreciated from Rs. 54.22 per $1 in January 2013 to Rs. 61.67 per $1 in December 2013. In September 2013, the rupee depreciation was the highest at Rs. 63.78 per $1. The following chart depicts the USD/INR exchange rate movement during 2013.
There is an interesting movement in BSE Sensex Index during 2013. It shows that the highest was recorded in December 2013, while the gold lost its value and by that time INR became weaker. The chart shows that the index started falling till August, after which it began to rise till October. In November the index fell a little, after which it recovered again in December.
The above chart is a comparison of the percentage changes in gold, BSE, and currency prices during 2013. The overall correlation through financial analysis is that as rupee depreciates the gold prices falls, and the BSE Sensex gains. In October, while the gold prices fell further, the rupee traded at the Rs. 62 per $1 levels, and the Sensex played at the 20,000 – 21,000 levels. Meanwhile, global investors sold their gold holdings in 2013, which can be seen from the data of gold holdings in SPDR Gold Shares, which is the biggest gold ETF in the world. It has come down by 40% from 1,351 tonnes in December 2012 to 814 tonnes in December 2013.
Does it mean that as the USD is appreciating, the price of Gold falls, and increased USD value is bringing more money for stock exchanges? Who is buying Gold in bulk -NRIs who deal in USD or locals who depend on the flow of foreign money to engage in trade or business? Does falling INR brings more investment to stock exchange? Let’s watch one more year and look for our analysis.
This article was written by Garima Saraff, Analyst with DART Consulting.