Investors left with no option but to swap major currency for lucrative asset class like gold
It is predicted that future growth will be evidenced in gold. The global economy in future may not based on the gold standard, but the recognized value of gold as the basis for real value — whether acknowledged by central banks or not — will never change. Historically, many civilizations have recognized the permanence of gold’s value. For example, Egyptian civilizations buried large amount of gold with deceased pharaohs with the confidence that they would be able to use it in the afterlife. Great wars were fought to plunder stores of gold.
Gold is the only real money, and its value cannot be changed or controlled by government. Governments overprint money in time of economic and financial crisis but certainly, they always return to gold. Goods and services can be paid for only with goods and services. Currency is nothing but a promissory note that is not backed up with any tangible value. Once we reach our national credit limit, monetary policy will be forced to pullback. When that occurs conventional investors and their savings accounts hit hard. The beneficial of the falling dollar will be the investor whose holdings emphasize tangible value of goods.
Investing in gold itself, mutual funds, or gold mining stock provides the most direct counter to the dollar. As the dollar falls, gold inevitably rise. Dollar holdings of commercial banks, representing foreign currency deposits of private residents climbed by Rs29.32 billion, during the first five months of the present fiscal year. During January to May, these holdings reported an increase of $140 billion to stand at $5.081 billion against $4.941 billion. According to the month-end statistics on liquid foreign exchange reserves given by the State Bank of Pakistan (SBP) shows that the dollar investments by the banks have been witnessing fair growth trajectory, as their volumes are more than that the foreign exchange reserves of the State Bank of Pakistan, which is evident from the fact that the net international reserves of the Central Bank reduced to $4.224 billion, while the reserves of commercial banks rose to $5.285 billion as of November 1, 2013. The dollar investments have outperformed bonds, stocks and real estate in the last few months, as people in order to get better profits, purchased dollars from the open market and deposited in their foreign currency accounts.
“In Pakistan, wealthy people are transferring their assets in foreign exchange,” said Dr Muhammad Yaqub, former governor of the SBP. Both exporters and importers are keeping dollars by under-invoicing and over-invoicing. At the same time, people convert their assets in dollars under the foreign exchange deposit scheme. It is expected to give them a higher rate of return than any other asset.
The State Bank governor had already admitted that around $25 million is being flown out of the country every day. The deposit mix ratio of commercial banks may comprise 75 to 80 percent local components and 25 to 20 percent foreign. In case of increase in it, the State Bank can impose a penalty on banks. Banks earned no profit on having such accounts and also obliged to sell dollars to the SBP to meet the demand for the foreign exchange.
Based on its groundwork stock market experts are quite optimistic that the local bourse will continue the positive momentum in the coming year. “We expect the KSE-100 Index to touch 30,000-mark in 2014, thereby, generating 17 percent to 18 percent return,” Mohammad Sohail, CEO of Topline Securities and Director at the Karachi Stock Exchange, said.
Market capitalization surged by 43 percent during the year, as it stood at Rs6.057 trillion on December 30, 2013 as compared to the capitalization of Rs4.242 trillion on December 31, 2012.
In the fiscal year 2014, Pakistan’s economy is likely to recover with GDP growth of four percent to five percent, after a gap of six years, with the support of manufacturing sector. The government’s large concentration on the economic and energy issues will help overall economic activity and investment climate in 2014. Huge liquidity and better economic recovery can take the market to even 33,000 points level.
The GSP Plus status for textiles, developments on the privatization front and the auction of 3G licenses, Pakistan will be observing a significant influx of funds, therefore, the current momentum is likely to continue going forward. Significant improvement’ in macro economy for 2014 highlights the investment community’s continued belief in the government’s reform plans along with the expectations of improvement in the circular debt in 2014.
Gold’s increasing attractiveness over the years is a result of increasing demand, falling supply and its influence as a safe haven for investment. Investors diversify their investments by including gold to maintain a stable portfolio. The commodity offers a strong hedge against falling interest rates, uncertain economic conditions, currency devaluation and losses incurred on other investments. Gold price increased from Rs6,280 per tola in 2002 to Rs62,600 per tola, currently.
Pakistan is currently going through political and socio-economic crisis. In times like these, gold is believed to be a hedge against losses made by other investments. Gold is the best store of wealth. Pakistani rupee has declined by almost 40 percent over the last 10 years and this gives gold an extra brightness as an investment. Gold prices are denominated in dollars, making it a good security in Pakistan.
The Securities and Exchange Commission of Pakistan (SECP) recently allowed asset management companies to offer gold schemes to investors. The introduction of the scheme was a longstanding demand of the local market and it is expected to become very popular. Credit rating agencies are grading lower world leaders like the US and France. Investors are left with no alternative but to swap major currency pairs for some lucrative asset class like gold.