Will fascination for gold cease in 2013? Find out

On CNBC-TV18’s special show Indianomics, Satyajit Das, derivatives and risk management expert and author of 'Traders, Guns and Money' highlights the reason for increasing demand of gold and the factors affecting its price. “It is behaving as a currency. This is because nobody wants to hold dollars, yen, euros and so they are buying gold as a proxy hoping to change back to these currencies. So it will depend on the qualitative easing and the policies followed by the central bank,” he adds.

Further Das says that the market is range trading until some issues emerge. But after that it is a binary bid for euro-dollar and one can bet on 1.50 or 1 in 2013.

Below is an edited transcript of Satyajit Das’s interview on CNBC-TV18
 
Q: You have lately written a lot about gold, how will it pan out in 2013? It created havoc in India in 2011-2012 with prices rising and the fascination with gold creating a huge current account deficit, do you think both the prices and therefore this fascination will recede in 2013?

A: You have to go back to fundamentals of how gold is behaving. It is behaving as a currency. This is because nobody wants to hold dollars, yen, euros and so they are buying gold as a proxy hoping to change back to these currencies. So it will depend on the qualitative easing and the policies followed by the central bank.

India has some different problems because in India the average person is building up gold. Allowing people to invest more in gold would mean writing gold imports which should give India a current account problem as well. So there are different dynamics working here.

Q: How will risk assets like equities pan out in 2013 or at least in the first half where you may have better visibility?

A: I think 2013 will be a little different. We have to see poor growth numbers and that means that the actual forecast that we are seeing now will have to be downgraded as the year proceeds. That will begin to weigh on everybody’s perceptional future.

Second, there will be increasing questioning of the policy initiatives of people because people have achieved these policy makers and have magic wands to wave around and fix problems. These are the same policy makers who create the condition for the crisis that haven’t done much to fix it and are now supposed to be able to fix all these problems.

I suspect the reality will hit that they are not going to fix the problems and then there will be tension between the politicians and the bureaucrats regarding the right policy because the political policy and the economic policy may not align. The last issue is quite considerable social upheaval.

You look at countries like Spain where the unemployment is over 25 percent for the general population and 57 percent for people under 25 and how do you hold a society under those condition. So those three stresses and particularly the second and third rather than the growth one will shape the year.

It will be the interesting market to trade but I do not see it having long-term direction at this stage because these issues are extremely fluid. Also different companies will approach this differently. The international cooperation, necessary to fix some of the fundamental problems, might be there. So you may see good news, bad news but it will be an interesting market to trade.

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Q: How do you think euro-dollar will pan out, does it meander between 1.28 and 1.32 like the past six-eight months or will there be very sharp moves in 2013?

A: If you look at the euro and say what was different in 2012, then the President of the European Central Bank Mario Draghi says he will do whatever it takes to save the euro and that will be enough. We haven’t seen what he is going to do. The problem is that may work because the moment you have the German taxpayers writing a cheque or problems within Germany like Budget deficits or unemployment or growth tapering off then it will be much more difficult for the German Chancellor to hold this together. I think that is a fascinating process.

It is a range trading market until some of these issues emerge. But after that it is a binary bid, you can bet on 1.50 or you could bet on 1, so buying out-of-the-money options seems to be the way to go on either side.

Q: How will the rupee fare? We are belaboring under a near 6 percent current account deficit, does it get as bad as 1990-1991 or will it be the most challenging year in the past twenty years on the rupee?

A: You are absolutely correct. The recent current account is weak but it is not due to gold, it is because your major trading partners like Europe, North America are weak. So your export numbers are going to be weak and your key import which is oil is up. We all knew that it would be up and the forecast was for the current account deficit widening but it has widened even more.

You have some other problems as well. One is the inflation in the domestic market, the Reserve Bank of India (RBI) is now caught between managing the currency. The RBI would prefer a devaluation of the currency to get some competitiveness but the problem is two-fold. One, inflation and cutting interest rates do not go together.

Second, if they allow the rupee to fall too much, the foreign currency debt of Indian cooperation which is quite considerable and some of it is coming up for repayment or rolling over will become unmanageable. They have the problems of the banking sector anyway, where NPAs are rising. So it is a very difficult policy dilemma and hovering all over that is the ratings downgrade. This is because I do not think you could take it for granted that India’s rating will stay where it is particularly if that conflagration of events that I am talking about takes place. So I think you have to be very cautious on the Indian currency.