This Time Is Different: Gold’s Plunge Doesn’t Lure Retail Buyers; Unlike after April selloff, Chinese and Indian consumers hold back; Gold Miners Trade Like Junk as Bullion Sinks Below $1,200

June 28, 2013, 6:27 a.m. ET

This Time Is Different: Gold’s Plunge Doesn’t Lure Retail Buyers

Unlike after April selloff, Chinese and Indian consumers hold back

CLEMENTINE WALLOP And BIMAN MUKHERJI

When gold prices tumbled in the spring, the world’s biggest buyers took advantage of the lower prices to snap up coins, bars and jewelry. In the current selloff, consumers in China and India are holding back.

That has worsened gold’s decline. It has now fallen 39% from its peak in 2011, and it dropped below $1,200 an ounce in U.S. trading Thursday for the first time in nearly three years.The caution shown by Asian gold buyers is making it harder for the market to soak up the billions of dollars of physical gold being unloaded by exchange-traded funds, which are seeing big redemptions by investors.

Despite a 13% drop in prices in June, Chinese and Indian consumers are holding back because of fears that prices will continue to fall and growing confidence that an improving U.S. economy and a Europe free from further debt crises mean the metal is no longer needed as a safe haven.

“Gold prices have been dropping, but with this second drop, buyers are actually holding back,” said Billy Chiam, director at dealer Gold Price Singapore. “Investors don’t want to take on too much risk at the moment, so they’re just coming slowly into the market.”

One sign of tepid demand is the sharp decline in sales of new U.S. gold coins, which are popular among Asian investors. The U.S. Mint has sold only 47,000 ounces of gold American Eagle coins so far in June, compared with 70,000 ounces last month and 209,500 ounces in April.

Demand for gold jewelry is steady in China but well below that seen two months ago, and investors are buying smaller, less expensive items, according to Yvonne Wang, a gold analyst at Beijing Antaike. A shortage of funds in China because of a liquidity squeeze in the financial system is also making investors reluctant to part with cash, Ms. Wang said.

“At the moment, there’s no sense of a bottom for gold, and people don’t know when the price will stop falling,” she said. “Investors prefer to keep cash in the bank rather than buy gold because it’s declining every day.”

Traders in Hong Kong—where some shops sold out of coins and bars in April—reported slow buying interest and a ready supply of bullion.

Demand is picking up modestly in India, but dealers said they expect the fresh buying to last no more than a few days, compared with several weeks in April.

“I expect this demand to last through the weekend, but thereafter it may fall again if prices rise internationally,” said Rahul Gupta, managing director of New Delhi-based jewelry chain P.P. Jewellers.

Demand in April, when gold tumbled 15%, was especially strong because it was just before India’s peak wedding season, when gold is typically bought as gifts for brides. But that’s ended and there are no Hindu festivals, which also typically boost purchases, coming up soon.

Recent moves by India’s government to clamp down on gold imports, meant to curb a wide trade deficit, are also hurting demand. Buying had already flattened earlier this month because of a higher import tax and restrictions on credit for bullion importers. The rupee’s fall to a record low has limited price declines in India by making imported gold more expensive in rupee terms.

The muted demand in Asia has left gold’s price floor looking shaky, analysts say, particularly given the persistent liquidation by bullion-backed exchange-traded funds. Gold ETF holdings—a pillar of support for gold over the last decade—have plunged since April and are now around 20% lower since the start of the year.

For those investors who bought gold after its April pullback to a low of $1,321.50 an ounce, the metal’s subsequent 8.8% drop is acting as a deterrent.

“People who bought it at the previous lows will have been burned over the last two months, which will have left a bad taste and may ward off impulse buying,” said Desmond Chua, analyst at CMC Markets in Singapore.

Gold’s Slump Fails to Excite Indian Shoppers After April Frenzy

The plunge in gold to an almost three-year low has failed to lure shoppers in India, the world’s largest consumer, as state curbs and a decline in the rupee to a record bolster the costs of imported metal.

Inbound shipments may tumble 52 percent to 150 metric tons in the three months starting July 1 from a quarter earlier as buyers keep away from stores, Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, said in an interview yesterday. Prices in India have fallen 14 percent this quarter, less than the 25 percent drop in London after the rupee lost 8.9 percent against the dollar to an all-time low.

“I will wait for prices to fall further and stabilize before buying anything,” Niranjan Sahoo, 41, an engineer by profession, said by phone from Angul in the eastern state of Odisha. “Prices will fall further between July and August and if they fall to 20,000 rupees per 10 grams I plan to buy 50 grams and keep it for my daughter’s marriage.”

While a 14 percent slump in prices in two days in April led to a buying frenzy from China to India and the U.S., shoppers are now waiting for bullion to extend the decline from near the lowest level since August 2010. That may accelerate the biggest quarterly slide since at least 1920 after investors cut bullion holdings to a three-year low.

India Disappointment

“The most obvious disappointment is India, as buyers there struggle to cope with both a weaker currency and recent government measures,” UBS AG analysts Edel Tully and Joni Teves wrote in report yesterday. “In addition to muted appetite on the back of the latest developments, the lack of clarity on what the new restrictions on the Indian gold market mean exactly for all those involved is also a contributing factor to the weakness.”

Futures tumbled to as low as 24,970 rupees ($419) per 10 grams on the Multi Commodity Exchange of India Ltd. (MCX) today, the cheapest since August 2011. The contract for delivery in August fell 1 percent to 25,112 rupees at 1:48 p.m. in Mumbai. Immediate delivery gold in London was 0.3 percent higher at $1,204.15 an ounce, 28 percent down this year.

Gold is heading for its worst year since 1981 after some investors lost faith in it as a store of value amid speculation the U.S. Federal Reserve will curb debt-buying. Demand in India has fallen after the government increased taxes on imports twice this year to try and rein in a record current-account deficit. The central bank has curbed overseas purchases on a consignment basis and limited imports for local consumption against cash only, prompting retailers to halt sales of coins and bars.

Suspending Sales

“Sales have fallen after we requested our jewelers to stop selling coins and bars,” said Haresh Soni, chairman of the federation. “There would be about 15 percent fall in gold consumption this year.”

Shares of Gitanjali Gems Ltd. (GITG), Titan Industries Ltd. (TTAN), Tribhovandas Bhimji Zaveri Ltd. (TBZL) and Shree Ganesh Jewellery House Ltd. are headed for quarterly declines as retail demand weakens and costs of importing gold increases. Gitanjali will change its product mix to focus less on gold jewelry because of the state curbs, Chairman Mehul Choksi said June 25.

Gitimaya Rath, a lawyer in Talcher in Odisha, who bought jewelry worth 100,000 rupees in April, said he would wait for prices to fall further before making fresh purchases. “I should have waited as prices are still falling. I bought in April as my wife asked me to buy and keep it to gift my son’s bride.”

More Measures

India could take more measures to curb imports, Economic Affairs Secretary Arvind Mayaram said June 18. Purchases were 117 tons in April after bullion entered a bear market, according to the federation. Imports were estimated at 162 tons in May, according to the Finance Ministry.

The shortfall in the current account, the broadest measure of trade, is the biggest risk to the $1.9 trillion economy, according to the central bank. The gap was $18.1 billion in January through March, compared with a revised $31.9 billion in the previous quarter, the Reserve Bank of India said yesterday. The deficit last quarter was 3.6 percent of gross domestic product, from an unprecedented 6.7 percent of the gross domestic product in October to December.

“Given gold buying over the past couple of months largely reflected frontloaded festival demand to take advantage of falling global gold prices, imports of gold are likely to have staged a retreat in June,” Mole Hau, an economist at BNP Paribas SA, wrote in a research note yesterday.

Bridal Trousseau

Gold is bought during festivals and marriages as part of the bridal trousseau or gifted in the form of jewelry by relatives. The festival season in India runs from August to October followed by the wedding season from November to December and from late March through early May.

“The fall in rupee against the dollar has negated the decline in international prices of gold, making imports less attractive,” federation’s Bamalwa said.

The rupee is down 7.7 percent against the dollar in 2013, the most after the yen in a basket of 11 Asian currencies tracked by Bloomberg. It slumped to an all-time low of 60.765 per dollar on June 26.

To contact the reporters on this story: Thomas Kutty Abraham in Mumbai at tabraham4@bloomberg.net; Pratik Parija in New Delhi at pparija@bloomberg.net

Gold Miners Trade Like Junk as Bullion Sinks Below $1,200

Barrick Gold Corp. (ABX) and Kinross Gold Corp. (K) are trading as if they’ve lost their investment-grade ratings after the price of the metal plunged 28 percent this year to the lowest since August 2010.

Barrick’s implied bond rating has deteriorated to Ba1, the highest junk rating, according to Moody’s Corp. Moody’s Investors Service’s actual rating for Toronto-based Barrick, the world’s biggest gold miner, is an investment grade Baa2. Kinross, Canada’s third-largest producer, also has an implied rating of Ba1, versus an actual rating of Baa3.

Barrick Chief Executive Officer Jamie Sokalsky is reducing spending and selling assets as gold heads for its first annual drop since 2000. Barrick, which had $12.5 billion of net debt as of March 31 and sold $3 billion of bonds in April to bolster liquidity, also faces higher costs at its delayed and over-budget billion-dollar Pascua-Lama gold project in the Andes.

“All the gold names have been pretty much getting hammered both on the credit side and the equity side for quite some time with gold prices coming down,” Wen Li, an analyst at CreditSights Inc., said in a phone interview yesterday. Pascua-Lama is also a “really big overhang” for Barrick, he said.

Barrick’s bonds have declined 12 percent since May 1, the fourth-biggest drop among issuers in Bank of America Merrill Lynch’s U.S. Metals, Mining and Steel Index. Goldcorp Inc. (G)’s notes have slid 9.4 percent and Kinross’s by 7 percent. The largest 50 issuers in the index have lost an average 9 percent.

‘Inevitable Pressure’

“If all currently planned projects go forward, and current metals prices and financial policies continue, the simple math results in inevitable pressure on credit metrics and ratings” in the industry, said Kevin McSweeney, money manager at CI Investments Inc., which oversees about $74 billion of assets.

Gold futures in New York yesterday dropped below $1,200 for the first time since August 2010, as signs of improving U.S. economic growth boosted speculation the Federal Reserve will wind down its asset-purchase program.

After rising to a record $1,923.70 an ounce in September 2011, gold futures for August delivery fell 1.6 percent to $1,192.20 at 8:47 a.m. today on the Comex in New York.

“Our investment grade rating was recently reconfirmed by all three rating agencies, with Moody’s re-confirming a Baa3 rating just earlier this month,” Steve Mitchell, a spokesman for Toronto-based Kinross, said yesterday by e-mail.

Debt Obligations

Barrick has the lowest operating costs of the senior producers and almost 60 percent of its production in the first quarter came from five mines at a cost of $591 per ounce, said Andy Lloyd, a company spokesman.

“Our debt repayment obligations in the next few years are modest, with the majority maturing beyond 2023,” Lloyd said in an e-mail yesterday.

Jeff Wilhoit, a spokesman for Vancouver-based Goldcorp, didn’t respond to telephone calls or an e-mail yesterday seeking comment on the bonds’ performance.

High-yield, or junk bonds, are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

Elsewhere in credit markets, Valeant Pharmaceuticals International Inc. (VRX) issued $3.23 billion yesterday of junk bonds to finance its buyout of eye-care provider Bausch & Lomb Holdings Inc. last month.

Valeant Bonds

The Laval, Quebec-based company also is planning $4.05 billion in loans to help fund the purchase. Valeant issued $1.63 billion of eight-year securities yielding 7.5 percent and $1.6 billion of five-year notes with a yield of 6.75 percent.

The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government was unchanged at 124 basis points, or 1.24 percentage points yesterday, according to data compiled by Bank of America. Yields fell to 3.18 percent from 3.22 percent.

In the provincial bond market, relative yields were unchanged at 72 basis points yesterday, according to another Bank of America Merrill Lynch index. Yields dropped to 2.91 percent, from 2.96 percent.

Corporate debt has lost 0.4 percent this year, Bank of America Merrill Lynch index data show. Provincial securities have slid 2.6 percent, and federal-government bonds have dropped 2.1 percent.

Default Swaps

The relative yield investors demand to hold Barrick’s bonds have surged to an average 332 basis points from 224 basis points on May 1, according to Bank of America. Its credit-default swaps have implied a speculative grade rating of Ba1, the highest junk rating, since mid-April and over the last two days dropped to as low as Ba3, according to Moody’s data.

Barrick could face a ratings downgrade of “another notch or so” if gold prices decline further and stay lower for a prolonged period, although it will probably remain investment grade, said Li.

“They will get hit pretty hard in terms of earnings and margins and free cash flow” at lower prices, he said.

Barrick has forecast it will cost $950 to $1,050 to produce an ounce of gold on average from all its mines this year. Goldcorp forecast a cost of $1,000 to $1,100.

Barrick’s net debt would probably increase to a peak of $15.8 billion in 2014 if it decides to cancel its Pascua-Lama project, assuming a gold price of $1,300, Anita Soni, a Toronto-based analyst at Credit Suisse Group AG, said in a note dated June 25. Net debt could rise to $17 billion in 2015 if the project on the Chile-Argentina border goes ahead.

Gross debt

Repayment becomes a concern with gold under $1,300, though only in the longer term because the company has good access to the debt market and $14 billion of its $17.7 billion gross debt is due in 2018 or later, she said.

Barrick had $2.34 billion in cash and equivalents as of March 31, according to data compiled by Bloomberg, and said May 2 it completed the sale of $3 billion of 5-, 10- and 30-year notes. The company also had undrawn credit of $2 billion, Chief Financial Officer Ammar Al-Joundi said on an April 24 conference call. The company’s debt repayment obligations through 2017 were less than its operating cash flow last year, he said.

Barrick, which last year raised the cost estimate for Pascua-Lama to as much as $8.5 billion, said June 3 that production won’t start in the second half of 2014 as planned, because of demands from Chile’s environmental agency, and that the delay would probably lead to higher capital costs.

Barrick will probably re-evaluate its capital spending plans in light of the current gold price, which may help reduce its financing burden, Joel Levington, managing director of corporate credit research at Brookfield Investment Management Inc. in New York, said in an e-mail.

“Barrick will be able to maintain investment-grade ratings, but a downgrade to low-BBB would not be surprising,” he said.

To contact the reporters on this story: Liezel Hill in Toronto at lhill30@bloomberg.net; Cecile Gutscher in London at cgutscher@bloomberg.net