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Gold prices inch closer to Rs 55,000 per 10 gm, global gold breaches $2,000; prices may rise more

Gold prices today continued to rally and made a new all-time high of Rs 54,797 per 10 grams, mirroring the rise in overseas gold. In the international market, gold and silver prices are rising at a significant pace, as both metals breached the key level of $2000 and $25, respectively. On MCX, gold October futures rose Rs 246 to hit a record high, while silver September futures fell Rs 186 or 0.27 per cent to rule at Rs 69,611 per kg. Analysts say diminishing hopes of an immediate economic recovery amid rising pandemic cases continue to support gold’s bullish outlook. “More economic stimulus measures from central banks to combat the economic blow due to the pandemic, escalating geopolitical uncertainties and a weaker US dollar will continue to lift gold’s safe-haven appeal and demand for the commodity,” said Hareesh V, Head Commodity Research at Geojit Financial Services.

With today’s rally in gold prices, the yellow metal is now up 42.32 per cent from March lows of Rs 38,500 per 10 grams. While silver prices have climbed up 107 per cent from Rs 33,580 per kg touched in March this year. Silver prices touched a record high of Rs 73,600 per kg in 2011. “Massive explosion in Lebanon raised geopolitical risk, worsening the US-China trade relation, weaker dollar and hopes of more economic stimulus to combat the blow from the COVID-19 crisis boosted the safe-haven metal’s appeal,” said Jigar Trivedi, Fundamental Research Analyst, Anand Rathi Shares and Stock Brokers.

Globally, spot gold hit a record high of $2,030.72 in early Asian trade but later dipped to $2,014.41, with the slight retreat attributed to profit-taking. US gold futures rose 0.7% to $2,032.30, according to a Reuters report. Holdings of SPDR Gold Trust rose 0.8% to 1,257.73 tonnes on Tuesday. “Sentiment is positive and we recommend to buy on dips,” Trivedi added.

Analysts expect a further rally in the gold prices owing to a host of factors. US Treasury Secretary Mnuchin said that negotiators will try to reach an overall agreement on a coronavirus relief bill by the end of this week. The US yields have fallen to their lowest further supporting the gold prices. “Market participants will focus on the service PMI number expected from major economies; if reported weaker than expectations than it will lend further support to metal prices,” said Navneet Damani, VP, Motilal Oswal.

Technical outlook

“Bullish outlook will continue and prices may look towards the next target of $2280 as long as it stays above $1980. However, a direct drop below $1880 could negate the outlook and take prices lower,” added Hareesh V.

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Favorable land rates, skilled workers could make India a lucrative investment destination post-COVID

India is the 5th largest economy in the world and the fastest-growing emerging economy. As of 2019, India’s nominal GDP stands at $2.94 trillion and it aims to aggressively accelerate this growth and hit the $5 trillion mark by 2025. The negative effects of the COVID-19 pandemic have affected the entire world. While the world searches for a vaccine, foreign investors of all sizes, be it FPIs or FDIs, are looking for safe-haven investment destinations which offer higher returns compared to their home country.

In the near future, the global economy is expected to contract by 4.9%. According to the latest IMF report, India is set to come out strong from this pandemic with one of the highest growth rates globally in 2021. This can be attributed to the robustness in the economic base that the country possesses.

In a globalised economy, foreign institutional investors which include MNCs and corporates have witnessed the consequences of putting all their eggs in one basket. Once China, the ‘world’s factory’ shut down, the supply chain disruptions were felt across the globe.

The Post-COVID World

In such unprecedented times, agile but decisive investment decisions can be the key to unlocking superior returns. Foreign institutional investors are now looking to not only diversify their supply chains but also invest in well-grounded economies. India provides this platform through its friendly foreign investment policies and availability of inexpensive skilled labour.

Post the dotcom bubble burst in 2002, India proved to be an excellent destination for foreign companies to outsource their software functions, thus setting up the ‘world’s back office’. Fast forward to 2020, the 400 million-strong workforce of India provides a strong resource for companies to employ at inexpensive rates as even the once labour-intensive manufacturing industry will transition to automated machinery over the next decade. This will require a different skill set to operate and India possesses this in abundance. In 2019, due to China’s demographic features, its workforce decreased in size. India’s growing skilled workforce provides a much more sustainable resource.

Another major factor of production, i.e land, is being offered at favourable rates to foreign companies which are looking to diversify their supply chain processes to India. The Indian government is in the process of identifying 4.6 lakh hectares of land, of which 24% is in industrial areas. This along with other financial incentives like tax breaks, tax holidays, etc. are all being looked at in a bid to attract foreign investment.

India witnessed an FDI inflow of $51 billion in 2019 which was a 20% year-on-year increase. While the United Nations Conference on Trade and Development (UNCTAD) has projected a decrease in inflows through 2020, it also foresees foreign investment to pick up and increase exponentially over the next decade. Signs of early investment which have the potential to effectively augment the economic output of the country comes in the form of Google’s plan to invest $10 billion over the next 5 to 7 years.

While FDI investments are made with the expectation to drive macro-economic growth over many decades, FPI investments are comparatively much smaller in size and are invested in liquid assets in search of capital gains over a much shorter term. These investments generally follow FDI investments and are affected by factors such as interest rates, real estate markets and stock market volatility. In the current economic climate with falling interest rates and low rental yields, equity markets are a more lucrative investment option for investors hoping to beat inflation.

The benchmark indices returned 16% CAGR from the start of the bull market in October 2008 till the peak of the markets in January 2020. As an emerging market, similar growth in the equity markets can be expected over the next decade with accelerated economic growth. With near-zero interest rates in developed countries like the USA as well as in Asian countries like Japan, India offers foreign investors an opportunity for interest rate arbitrage. Investors in Indian sovereign bonds stand to reap healthy returns from one of the highest credits rated countries in the world.

No one can predict when the Post COVID world will arrive or what it will look like but some of the key economic lessons learnt through this period include the need for a well-diversified, robust supply chain process. So, when the demand for goods and services finally returns, it can be met. India’s friendly political relations with the global economy and lucrative factors of production will stand it in good stead in the Post COVID world.

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Global markets sink after Federal Reserve warns coronavirus may threaten modest economic recovery

Global markets and US stock futures declined Thursday after the Federal Reserve warned the coronavirus pandemic might threaten the modest economic recovery and kept interest rates near zero. London and Frankfurt opened lower. Shanghai, Tokyo and Hong Kong retreated after spending part of the day in positive territory. Lower interest rates and investor optimism about a possible coronavirus vaccine have helped global markets recover most of this year’s losses. But analysts say it might be too early to bet the recovery will persist, given the rising infection numbers in the United States, Brazil and other countries.

On Wednesday, Fed Chairman Jerome Powell warned that rising U.S. cases, which have led some state governments to reimpose anti-disease measures, threaten the modest recovery from the pandemic. The Fed said it would keep buying USD 120 billion of Treasury and mortgage bonds every month to encourage borrowing and spending, but Powell said Congress needs to take action. Legislators have yet to agree on aid after USD 600 in weekly unemployment benefits for millions of Americans run out this week.

The current situation is all about money in consumer pockets, which is precisely why fiscal policy is so much more important,” Stephen Innes of AxiTrader Corp. said in a report. In early trading, the FTSE 100 in London lost 1.4 per cent to 6,045.65 and Frankfurt’s DAX retreated 2% to 12,565.75. The CAC 40 in France declined 0.8 per cent to 4,917.54.

On Wall Street, futures for the benchmark S&P 500 index and the Dow Jones Industrial Average were 1per cent lower. On the S&P 500 index rose 1.2 per cent after the Fed’s rate announcement. The S&P 500, which was down 34 per cent earlier, is back within 3.8 per cent of its February record. The Dow rose 0.6 per cent while the Nasdaq composite added 1.4 per cent.

In Asia, the Shanghai Composite Index lost 0.2 per cent to 3,286.82 and the Nikkei 225 in Tokyo gave up 0.3 per cent to 22,339.23. The Hang Seng in Hong Kong tumbled .07 per cent to 24,710.59 after data Wednesday showed the territory’s economy shrank by 9 per cent in the quarter ending in June. The Kospi in Seoul advanced 0.2 per cent to 2,267.01 and Sydney’s S&P-ASX 200 added 0.7 per cent to 6,051.10. India’s Sensex shed 0.6 per cent to 37,847.47. New Zealand and Jakarta advanced while Singapore and Bangkok retreated. Also Thursday, Japan reported retail sales rose by a better-than-forecast 13.1 per cent in June over the previous month.

That means retail sales in one of the world’s biggest markets were only 0.9% lower than in February before the crisis hit, Tom Learmouth of Capital Economics said in a report. In the United States, some companies are reporting quarterly results that exceed forecasts, though they still are well below pre-virus levels.

On Wednesday, Advanced Micro Devices rose 12.5 per cent after it reported stronger profit than Wall Street expected. Starbucks gained 3.7 per cent after it reported a loss that wasn’t as bad as analysts were expecting. Eastman Kodak surged 318.1 per cent, gaining for a second day after the company won a USD 765 million government loan to launch a new business unit making pharmaceutical components. Shares rose to USD 33.20 from USD 2.62 on Monday.

Amazon added 1.1 per cent Wednesday, Apple rose 1.9 per cent, Facebook gained 1.4 per cent and the Class A shares of Alphabet, Google’s parent company, were up 1.3 per cent .

Gold rose to USD 1,953.50 per ounce from Wednesday’s USD 1,953.40. Benchmark US crude lost 58 cents to USD 40.69 per barrel in electronic trading on the New York Mercantile Exchange. The contract gained 23 cents on Wednesday to USD 41.27. Brent crude, used to price international oils, shed 50 cents to USD 43.59 per barrel in London. The U.S. dollar rose to 105.14 yen from 104.90 yen on Wednesday. The euro fell to USD 1.1734 from USD 1.1789.

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Indian steelmakers may face severe headwinds this year; low demand, sales set to hurt profits

The coronavirus pandemic is likely to take a toll on steel businesses in India as the steel consumption in the country is expected to fall by at least 10 per cent for rated Indian steel-makers in the 12 months to March 2021. The ongoing demand shock and an inability to pass on elevated costs to customers will severely hit the profitability of Asia Pacific steelmakers over the year to March 2021, said a report by the Moody’s Investors Service. While the profitability is set to drop 15 per cent in the current fiscal, the sales volumes will contract for the first time since 2015.

Unlike previous downturns that were prompted by supply gluts linked to large capacity increases, the coronavirus-led downturn has caused demand destruction across major steel-user industries,” said Laura Acres, Managing Director in Moody’s Corporate Finance Group. On the back of the supply disruptions among major steel producers, the prices are also expected to remain at elevated levels throughout the year.

The report highlighted that the falling automaker demand and weakness in the construction, infrastructure, and shipbuilding sectors will result in sales volumes contracting for the first time in the last five years. Sales volumes will fall by mid-single digits in Korea (Aa2 stable) and Australia (Aaa stable), and in high single-digits in India (Baa3 negative), the report added. Kaustubh Chaubal, Moody’s Vice President and Senior Credit Officer, said that the outlook for the steel sector is negative.

Meanwhile, in the month of May 2020, India produced only 5.8 million tonnes of steel which was a fall of 39 per cent on-year, however, India remained a net exporter of finished steel during June 2020 with a net trade surplus of 1.3 MT. China and Vietnam were top destinations for Indian steel exports as these two countries together accounted for nearly 64% of total steel exports from India in June 2020, which was substantially higher as compared to just 6.2 per cent in June 2019, according to Care Ratings. On the other hand, UAE and Nepal which together accounted for 40 per cent of total steel exports from India in June 2019 saw their share fall to just 8% in the same month this year.

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