Just as US investors are advised not to fight the Federal Reserve, gold investors worldwide would be well advised not to fight the Government of India. India is the world’s largest gold consumer [and their intent on curbing gold imports by any means necessary could have a negative effect] on world gold demand [and, as such, most likely, on gold prices. IMO,] at best, we will see a sideways market in the price of gold in 2013, and at worst, this will be the year when gold prices start the inexorable drop.
So writes the Macro Investor in edited excerpts from an article* posted on Seeking Alpha under the title Gold Under Pressure From New Indian Government Push.
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The article goes on to say in further edited excerpts:
First, some context. India is the world’s largest gold consumer at ~800 tonnes of imports in 2012. This is a major drag on Indian foreign currency reserves contributing majorly to the current account deficit, so the Government of India has over 2012-13 taken steps to curb gold imports:
- banks were prohibited from lending money to buy gold and then
- the import duty on gold was increased in steps to the current 6%.
This suppressed gold demand and with it the price of gold. After rising steeply untill end 2011, gold prices have more or less moved sideways, as the chart below shows.
[Earlier this month] the Indian Central Bank, the Reserve Bank of India, released the recommendations of its gold control panel. The messages couldn’t have been more direct: if the import price hikes are not enough to lower gold imports to a level that the Government of India approves, they will set outright demand quotas. So, from price manipulation via import duties, they are going to move outright to quantity manipulation via quotas.
The price imports alone cut down gold demand by ~200 tonnes in 2012, going from ~1000 tonnes in 2011 to ~800 tonnes in 2012. The Government of India is clearly not happy with this level and wants to push it even lower. Another ~200 tonne drop in 2013 may not be out of the question here.
How did the market react to this declaration by the Government of India? As expected, gold prices dropped, as the chart below shows.
The abovementioned declaration by the Government of India means 2013 will likely be a difficult year for gold bulls. The silver lining (pun intended) in the story is that China is apparently going to make up for some of the lost demand. However, even with increased Chinese demand, it is hard to project a scenario where world gold demand rises significantly in the near future, as lower Indian demand is merely offset by higher Chinese demand. So at best we will see a sideways market in the price of gold in 2013, and at worst, this will be the year when gold prices start the inexorable drop.
What does this mean for your investment thesis for the rest of 2013, dear reader? Well, my projection for gold prices in 2013 remains unchanged:
Shorting gold — especially via the miners (GDX, DUST, NUGT) — remains the play for 2013….I think the miners are really setting up to be perma shorts with falling gold prices and rising mining costs….
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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