Investors opt for gold, dollars amid crisis
As Pakistan struggles with rising inflation and the prospect of a rupee depreciation, gold and the US dollar are emerging as top safe assets for investors looking to hedge funds which they store. With an International Monetary Fund (IMF) loan program currently suspended and no immediate upfront payments, this asset is becoming increasingly popular amid growing economic crisis.
AA Gold Commodities, Director, Adnan Agar said in an interview with The Express Tribune, “Gold and US dollar will be the preferred assets in the eyes of non-IMF investors, or IMF equity markets. ”Efforts to revive the stalled $6.5 billion IMF loan program have been underway since November 2022. But indications are that the program will end before it resumes on June 30. The government plans to start negotiations on a new program and IMF staff after presenting the annual budget in the National Assembly on June 9.
The absence of an IMF program has hit the economy hard, leading to factory closures and rising unemployment. The longer it takes to engage with the IMF, the more likely the economic crisis will be. Under such circumstances, individuals with savings carefully evaluate which assets will provide the highest return on investment. Agar believes that historically the US dollar has been the preferred asset, but its shortage in the market due to very low foreign exchange, currently at $4.09 billion, makes it uninvestable . . . .
He expects the country to not fail before September 2023 without the IMF, but the economy could suffer another setback given the ignored imports, which are vital for industrial recovery. Therefore, gold has emerged as an attractive investment option in Pakistan. By 2022, gold will offer the highest return on investment, rising by an impressive 41%. Gold’s attractiveness stems from its ability to hedge against currency devaluation and the potential for appreciation in global markets, especially amid a potential US recession and a shift towards devaluation of the dollar in international trade.
Agar estimates that if the IMF program ends without resumption in June, the rupee could depreciate to about 300 cents/$, compared with the current exchange rate of Rs285/$. If Pakistan defaults on its dues, its currency could fall to 340-350/$, as the new IMF scenario under consideration is likely to be tougher than the one due in June.Taurus Securities estimates that the rupee could hit 295/$ by the end of June 2023 due to dollar shortage and high external debt repayments, which will further weigh on the exchange rate.
Agar explained that a possible devaluation of the rupee would automatically increase the price of gold. Furthermore, if the global gold price also increases at the same time, the gold market in Pakistan will grow significantly. In recent days, gold prices in Pakistan fell to Rs 231,400 per tola (11.66 grams) from Rs 240,000. Despite the shortage of US dollars, there is plenty of gold in the local market. The Pakistan Mercantile Exchange (PMEX) alone has a stock of more than 500 tolas of gold available for physical delivery to investors.
Agar noted that traders who have been hoarding gold are now disposing of their inventories, possibly aiming to book profits and possibly waiting for a correction in gold prices before buying back into the commodities.
