Gold prices continue to fall as India remains sidelined

In the Lead: “Ben rattles Ron’s gilded cage”

Gold prices fell toward the $1,645 level at the opening of the midweek session in New York as the US dollar climbed slightly on the trade-weighted index (it was last quoted at 79.70). The initial action was rather subdued but, after yesterday’s additional 1% decline in values to fresh two-month lows, speculators were perhaps justifiably skittish about jumping into the “pits” with both feet, especially as talk continued about lackluster physical gold demand, the continued “absenteeism” by Indian jewelers, and the perception that, ever since the hopes for additional Fed stimulus have been recently dealt a blow, fund liquidations in bullion have been visible while retail investment has not. Gold trading activity on the LBMA fell by 12% last month to a daily average of 19.5 million ounces.

For the first time in seven years, nearly 90% of India’s jewelers (thought to be numbering near 300,000) stayed sidelined as they continued to protest the government’s most recent proposal to hike excise duties on non-branded gold baubles. Their displeasure with the tariff has thus far been met with silence and inaction on the part of the Indian government. The final tally of the Q1 demand for gold by India might well be worth staying tuned for, at this juncture. For the time being, the Chairman of the All India Gems & Jewellery Trade Federation said that his country is — for all intents and purposes — “out of the market.”

Seeking Alpha contributor “The Mercenary Trader” provided a fairly comprehensive list of the factors that are currently handicapping gold, in his latest posting on the SA website. Among them, and well-worth noting by perma-bulls, are the following items:

For starters, “gold has consistently traded more as a speculative vehicle than a risk hedge. There is an argument that gold is a useful hedge for one’s portfolio — a way to protect against certain types of risk, like inflation and currency debasement risk. This argument is invalidated by the [recent] price action. Gold has not traded like a hedge, but rather a speculative plaything linked to visions of $5,000 per ounce (secondarily the same idea with silver). What kind of hedge gets the stuffing kicked out of it along with all other risk assets when there is a “risk off” meltdown?”

Then, in the event that “we see full-on global slowdown, precious metals will get hammered. Again, what kind of hedge is so failure-prone under hedge-worthy circumstances? If China truly does experience a “hard landing,” the shock of global growth deceleration, plus a sharply rising US dollar, could cause gold to fall further, to the tune of hundreds of dollars per ounce.”

Further, “the long-term monetary velocity arguments (we referred to those in Monday’s post) are suspect too. There is an argument that true global recovery is what will finally send gold over the moon, as monetary velocity increases faster than CBs (central banks) dare to withdraw their support. But if this happens, wouldn’t it make more sense for investors to salivate over, say, railroads or coal producers or other participants in the global growth paradigm?”

Finally the M.T. argues, “Gold’s super-heavy retail participation could turn from a blessing to a curse. The big gold ETF, GLD, is pegged as the best thing to ever happen to the yellow metal. At nearly $70 billion, GLD has brought in tens of billions worth of “little guy” investor participation. But what happens if those little guys are forced to puke up their positions in a bear market movement?” These are all good questions, but they are mostly being swept under the rug as stories relating to a possible $32,000+ gold price target (by 2015 nonetheless!) are making the rounds in gold-oriented forums and are far more ‘desirable’ to read than the above tales of caution…

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