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Gold just can’t seem to get any traction any more. The Feds announce
QEternity, and gold moves down. Fiscal cliff talks fall apart, and gold still stagnates. Why is this the case? I think weak Indian demand is the culprit. [This article explains why that is the case and why that could be exacerbated in 2013.] Words: 1100
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The article goes on to say, in part:
[The chart below shows]…how the yellow metal and the miners have done in the past month. Both are down about 4%. In the meantime, the S&P is up about 1.4%.
…I keep seeing articles stating that 2013 will be the year for gold but, unfortunately, Indian gold merchants disagree. India, just for the record, is the world’s largest consumer of gold. If the Indian gold merchants expect prices to be flat, then probably it is going to be flat. These guys know well where the demand (or lack thereof) is. Reports the Economic Times:
According to analysts, gold prices are likely to settle around Rs 29,000 to Rs 32,000 per 10 grams in the near term …
Gold prices in the capital fell by Rs 220 to Rs 31,000 per 10 grams on Wednesday, so there we have it. Gold per 10 grams to go up nominally by at most ~3%, from Rs 31,000 to Rs 32,000, with a good chance of falling by ~6% to Rs 29,000 as well. This, mind you, is a nominal price increase. Inflation in India runs at around 8% per year, so whichever way you cut it, investors in India are expecting a drop in the price of gold in real terms.
[An expected drop in the price of gold] is not surprising, as the Indian government has been trying its level best to curb gold consumption by Indians [as I discussed in a previous posting** on Seeking Alpha entitled Can Gold Survive Lack Of Demand In India? in which I said the following:India consumes about 25% of the world gold demand, and these days it is buying less and less of the yellow metal.
India has historically been the country that drove world gold demand even when there was no rush to gold in the Western world. Indians have strong cultural and economic reasons to buy gold.
- The economic reason is straightforward. Inflation in India has been high for a long time, in the 5-8% range. Gold is therefore seen as a store of value.
- There are also strong cultural reasons, in that Indian brides are supposed to be gifted gold jewelery.
- Coupled with the fact that in rural India there are very few financial institutions (though that is changing) and hence fewer opportunities for alternative investments, gold has for a long time been the store of value for Indian families, especially from the rural regions – and India is still, by and large, a rural country.
However, this level of gold consumption puts the Indian government in a sticky situation. India produces very little gold locally. It imports most of its gold and in the 2011/12 fiscal year…[that] amounted to $58B…[or] about 3% of the Indian GDP….To add to the problem, India has a persistent current account deficit…[at]around 4% of GDP per quarter, or about $17B.
Naturally, the Indian government doesn’t like this, so it has taken some steps to stop the gold import.
- It raised import taxes to 10%, which means now a gold investor has to wait for more than a year at current inflation rates for the investment to make sense.
- More importantly, it banned banks from issuing loans for the purpose of buying gold.
So, gold demand has promptly collapsed in India. In 2011, India imported about 1000 tonnes of gold. The 2012 numbers are looking like 800 tonne. and in 2013? Well, the projections are 550 tonnes, a whopping 45% decline from 2011 levels….
When the entity that buys 25% of global demand decides to slim that down by 45%, I posit prices will follow suit.]
Jewelers are expecting higher sales during the Pongal festival but Reuters reports that retail demand remains weak….and the culprit, according to Wall Street Journal reports… is that investors eye stronger gains from equities.
Here is the trouble:
- If equities return more than gold, Indians will buy less gold.
- That will push pressure on gold demand and hence price, and make equities look even better in comparison to gold.
- This cycle will feed on itself as gold keeps getting more and more out of favor.
- Historically, Indians didn’t have too many places to invest outside of gold but that is not true any more.
With the economy forecast to do better in 2013, equities will likely boom, and smart Indian investors are making the bet.
Conclusion
Given the above, I continue to urge caution to gold investors…. I believe both physical gold and gold mining stocks will continue to struggle in 2013 as Indians turn away from gold. However, I also know how the gold market goes – it is not in any way based on fundamentals, it is all about sentiment – so I am not about to short gold, but I must say I am sorely tempted. That said, I believe gold investors can still make upwards of 50% this year. I explained that in my article Make a 153-174% Return – With 95% Confidence – IF Gold Goes Up Just 10% in 2013! Here’s How [and silver investors too – Read: If You Think Silver Is Going To Increase In 2013 Here’s How to Best Maximize Your Return].
Happy investing.
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*http://seekingalpha.com/article/1085551-gold-cannot-seem-to-make-a-move-even-with-fiscal-cliff
**http://seekingalpha.com/article/1065141-can-gold-survive-lack-of-demand-in-india
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