Gold Yearly Review: Domestic Bullion strikes it rich in 2023

January 01, 2024 (MLN): Domestic bullion investors have joyed magnificent investment returns for 2023 as the yellow metal has delivered an impressive 19.63% yield for the year.

The 24-karat gold concluded 2023 at Rs220,000 per tola compared to the closing price of Rs183,900 per tola in the Same Period Last Year (SPLY).

While reviewing the performance of the domestic bullion during 2023, it is crucial to mention that the majority of the gains were witnessed during the first half wherein the price of 24-k gold reached Rs216,000 per tola.

During this phase, the challenging political and economic landscape in the country prompted investors to seek refuge in safe-haven assets such as gold.

The key factors that exerted pressure throughout the year were the high debt payments, depletion of foreign exchange reserves, increased profit repatriation, political instability, negative current account balances, and soaring inflation.

These deteriorating indicators also draped shadows over the local unit, causing it to further depreciate against the mighty dollar and, consequently, domestic gold benefitted.

In sharp contrast to the challenging macroeconomic conditions that had affected the Pakistani rupee adversely, a sense of positivity emerged in the market during the second phase of the review period.

The successful $3 billion loan program with the International Monetary (IMF) came as a relief to the cash-strapped country and averted it from a sovereign debt default.

However, the primary factor for the regained momentum in the currency was the government-backed crackdown on illegal dollar trades which significantly strengthened the home unit.

This delight was further buoyed by the regulatory reforms introduced by the State Bank of Pakistan (SBP) to consolidate and transform various types of exchange companies into a single category with a well-defined mandate and higher capital requirements.

These combined efforts enhanced transparency in the financial markets and resulted in the currency earning the title of the best-performing currency in September.

Despite this good push, the Pakistani rupee (PKR) concluded 2023 as one of Asia’s worst-performing currencies, plummeting by 55.43 rupees or 19.67% against the US Dollar on the back of a continuous shortage of dollars and high financing costs.

The relationship between domestic gold price and the local Rupee is that the metal is denominated in U.S. dollars and when the home currency depreciates against the greenback, the value of gold spikes.

To note, the lowest intraday price for 24-karat gold occurred on October 04, 2023, reaching Rs188,400. Conversely, the peak price was registered on September 02 at Rs242,700 per tola.

Global Trend 

In addition to the depreciating PKR, the gains witnessed by the domestic gold were mainly driven by the surge in global prices.

The international spot experienced a robust rebound this year and snapped its two-year declining trend by surging over $239 per ounce this year to settle at $2,062.97.

The rally during the first half was supported by banking stress in the US coupled with bets for a pause in U.S. rate hikes.

The upward trajectory extended towards the second half as war broke out between Israel and Palestine which accelerated a flight to the safe-haven assets such as gold.

Furthermore, investors' bets for a pause in rate hikes were fulfilled when the Federal Reserve hinted at the peak of interest rates.

As per the latest minutes of the FOMC meeting, survey respondents assessed that uncertainty around the likely peak level of the policy rate narrowed relative to the comparable results from the December surveys.

Moving forward, investors' sentiments were shifted toward a rate cut as the U.S. Fed maintained interest rates at 5.25%-5.5% for the third consecutive meeting and signaled a cumulative reduction of 75 basis points in 2024.

Accordingly, the 10-year U.S. government bond yield dropped to 3.866% by December end, in contrast to the rate of 3.88% at the close of the same period last year.

Likewise, the U.S. Dollar Index (DXY), which tracks the value of the mighty unit against six other top currencies fell by 2.04% in 2023 after experiencing two straight yearly rises.

A weaker dollar makes gold more affordable for holders of other currencies, exerting a favorable impact on gold prices.

Similarly, declining bond yields lower the opportunity cost for holding zero-yielding gold, which is bullish for gold.

Thereby, the commodity's spot rates remained elevated during the latter half of 2023 and reached an unprecedented peak of $2,077.12 on December 27, 2023.

Struggles and Key Developments in the Domestic Gold Market

The second half of 2023 was of continuous fluctuations and challenges for domestic bullion due to certain disturbances arising to issue one uniform rate.

The army-backed crackdown that had made the dollar relatively weaker against the Rupee prompted people to accumulate gold as it was recently available at lower rates.

Consequently, this resulted in a massive surge in gold transactions which further led the governmental authorities to crack down against gold dealers, causing panic in the bullion market.

Due to these operational disturbances, the leaders in the market reached an agreement with the authorities to officially close the market.

To note, the closure period for the domestic market lasted for 27 days, from October 10 to September 12, 2023.

When the market reopened after this suspension interval, the gold price took a serious hit and plunged to Rs199,500, reflecting a decline of Rs15,500 per tola from its previous closing value of Rs215,000 on September 12.

This shock was attributed to a significant decline in international prices and a relatively strengthened local currency during the suspension period.

Despite being officially restricted, certain covert bullion operators persisted in trading gold, which further created challenges due to significant disparities arising in the rates that were being quoted by different cities.

To address this turbulence in the domestic gold market, the president of the All-Pakistan Sarafa Gems and Jewellers Association (APSGJA) further reached an agreement with all provinces to charge a premium of $20 on top of the international gold price for a unified domestic gold rate calculation.

Additionally, the central bank also authorized all gold dealers to calculate domestic bullion rates using the interbank exchange rate.

Following this, another noteworthy development was the establishment of a 15-member advisory council with the singular objective of ensuring transparency in gem and jewelry exports.

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