Budget 2013: Will gold shine brighter?
Budget this year would be very crucial not only for the commodities markets, but also for other financial markets and for the economy as whole as it is a last budget before 2014 elections. It is expected to be the most rigorous budget this time as India is trying to reduce its fiscal deficit and trying to skip the major credit downgrade. The prime target is to focus on reducing the spending by the government which has already been started and has reached almost 9 percent from the initial target.
Out of these spending cuts the prime focus would be to reduce the imports of Gold and Oil which has been increasing the Fiscal deficit of the country tremendously. Already steps have been taken to reduce the imports of Gold and Oil, however the major factor which will play role to determine the direction of gold prices would be the fluctuation in Indian rupee after reforms announcements and demand for Gold in India, checking its safe haven appeal and inflation hedge appeal.
The rupee fluctuation has always been a crucial factor in determining Gold prices and it is well known that a weaker rupee can support the gold prices and vice versa. As expected if there are more spending cuts and reforms taken to boost the equity markets and debt markets we would see a possibility of rupee strengthening and pushing gold prices down.
Recently after a series of reforms taken by the government on gold import duty, rate cut and partial deregulation of diesel prices we saw a good fall in gold prices along with the strengthening of Indian rupee. The reforms opted to reduce the Fiscal Deficit will make INR stronger and gold prices weaker; at the same time the level and ways of reforms will also form a crucial part in deciding the fate of gold. In pre-budget discussion among the party the finance minister assured that by the spending cuts and other reforms economy can see a growth level of 6-7% in the coming fiscal year. Also, FinMin has already committed to a fiscal deficit of 4.8 percent of GDP in 2013-14 which indicates lesser spending and tightening of imports and stronger rupee. This means, more open markets for investors abroad, reduced spending, reduced fiscal deficit and stronger rupee. As this fiscal consolidation can improve the outlook of the economy it will also reduce the safe haven appeal for gold and reducing the demand for gold.
A positive outlook for an economy is always been an eye for an investors to go for riskier assets. Investors will focus more on open markets and will go with the flow. This means that an investor who was more prone to safe investment such as gold before would then opt for riskier assets such as equities, derivatives etc. to increase their disposable income. Gold’s inflation hedge appeal and safe haven appeal would be dull marginally due to which prices can be moving down.
However, in India gold buying is a tradition. So buying will be seen in the later weeks when prices reach to an optimum level. So does this mean we should buy gold now? The clear answer would be, No. As budget is expected to be not Bullion friendly we recommend being on selling side rather than buying. Stronger rupee, lesser demand, reduced safe haven appeal, improving economy, expected controlled inflation and more open markets is expected to come from FinMin in the budget which can surely dent the gold prices. Adding fuel to the fire could be introduction of Commodity Transaction Tax(CTT), it will increase the cost to transact in commodities and reduce the demand for major commodities. At the same time we do not expect a boost in the gold demand as physical demand of gold in India and abroad is in slack. The demand for gold in 2012 was stagnant due to overall economic slowdown and in 2013 the demand for gold isn’t looking that great either.
So our recommendation would be to Sell gold before budget at the price range of around INR30,450-30,500 and wait till prices reach near INR30,000-29,800. A possible buying can be seen at these levels post budget. As bargain hunters can support the prices at these levels along with the international gold price pressure. However if prices go beyond INR30,800 fresh buying can emerge.
The writer is a CEO at Emkay Commotrade