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Thursday, April 19, 2012

More info on Gold Demand in India

...provided by goldbug GoldCore, in his SEEKING ALPHA post, 'Central Banks Favour Gold As IMF Warns Of 'Collapse of Euro' And 'Full Blown Panic in Financial Markets'  (see first excerpt below), and from Christian Magoon, in his SEEKING ALPHA post, 'Will Gold Dodge These 2 Bullets?' (see second excerpt below).

BTW, the IMF warning which GoldCore headlines ? It's not prominent in the April 2012 IMF World Economic Outlook Report, but cited among 'Several trail risks' that 'are hard to quantify but merit attention'. For the skinny on the WEO Report, click here. For the full report, click here

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India's central bank is further debasing the Indian rupee which will lead to further safe haven demand for gold, and is still the world's largest buyer of gold.
India has had its first rate cut in 3 years and was cut by a higher than expected 50 basis points to 8%.
This comes despite inflation being higher in March compared to last month surging to 9.47%.
The recent tax increase on gold was a futile attempt to curtail gold demand - as Indian policy makers realised accelerating inflation would lead to further gold demand.

Wedding season is at its peak in India now and Akshaya Tritiya, a large gold buying festival, happens later this month. There are forecasts of a 25% increase in demand during the Hindu festival next week after demand was curtailed during the gold jewelers strike (see Other News below).
Deepening negative real interest rates in India and the risk of an inflation spiral will see Indian demand remain robust and it may even accelerate if inflation deepens - contrary to suggestions that Indian gold demand will fall precipitously

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There are two nations that lead the world in gold consumption - India and China. Both countries have strong cultural ties to gold and heavily support the number one driver of gold demand: jewelry. However, now both countries are showing symptoms that could materially impact their consumption of gold thus firing a shot at gold prices. China has publicly revised its economic growth expectations downward. India is expected to do so as well after recent discouraging GDP data. These economies which were significant growth engines - even during the financial crisis - are slowing down. That will weaken gold demand and thus prices.

In addition, India has now targeted gold with a move to double the tax on imported gold. While a 21 day national jeweler's strike in reaction to increased gold taxation recently ended, it seems likely that the doubling of taxes on imported gold will occur. This is a negative influence on gold demand in the largest consumer of gold in the world as of the 2011 calendar year.

So can this demand bullet be dodged? The answer is yes. China's economic slowdown could occur in a soft enough way to minimize impact. In addition, its central bank could use weakened gold prices as an opportunity to purchase more reserves to back up its massive exposure to paper currency including the U.S. Dollar and Euro. India is trying to jumpstart its slowing economy by cutting interest rates and the cash reserve ratio for banks. This excess liquidity has the potential to boost economic growth and thus demand for gold. In addition it also has the potential to strengthen the rupee, a currency that has weakened due to repercussions from the EU debt crisis. A stronger rupee makes gold more affordable to the second most populated country on Earth.

The second bullet [threatening the price of Gold] is the strengthening of the U.S. Dollar. Gold is primarily denominated in U.S. Dollars so a stronger dollar means gold is worth less dollars. What's behind the threat of a stronger U.S. Dollar? Simple, the EU debt crisis. Recently Spain has elevated this threat, with France potentially right behind it. In late 2011 it was fueled by the flare up in Greece. Gold swooned versus the U.S. Dollar during that period as investors went "risk off" and jumped into greenbacks. (see chart near the end of the article) Now as Spain heats up and pivotal elections near in France, this bullet seems to have gained in size and velocity.

So can this bullet be dodged by gold? The answer is not entirely, or in other words no. Gold has already been impacted by drama in Spain, but substantial damage has not occurred yet. If Spain can be contained and bailed out by the EU establishment, the impact on gold could be similar or less to Greek crisis. Remember markets have been through this event not that long ago.

The big concern is not Spain but an implosion of France. The debt to GDP ratio in France officially is 86% - more than Spain or Britain. Unofficial calculations put that figure closer to 150%. Perhaps that's why the markets are making France pay almost twice the borrowing costs of EU partner Germany. Don't tell that to the Socialist party in France however, as they dislike austerity and instead want to spend their way out. (more on that below from the BBC) In addition, this party predictably has issues with Germany's austerity push within the EU community. President Sarkozy, under election pressure, has even begun to break with the Germans and the ECB.