Gold heads lower as dollar strengthens

In the Lead: “Mumbai, We Have A Gold Problem”

Dr. Chakrabarty also noted in Mumbai this weekend that in order to achieve the aims of India’s central bank as regards the dampening of domestic gold demand, nothing short of a “big shift in people’s social and cultural attitudes towards gold” would do the job, highlighting the fact that “the societal obsession with gold is an archaic idea of the pre-historic times when India was a rich society of abundance.” The problems that India is currently grappling with within the context of its burgeoning current account deficit have been attributed almost entirely to the large amounts of gold and oil that the country imports on an annual basis.

However, the Deputy Governor had more than just the unbalanced Indian fiscal situation in mind when he advised that India’s gold “problem” has become quite estranged from what one might call the traditional so-called “love” trade and that the appetite for gold has, by now, unfortunately morphed into the “love of quick money” trade. Dr. Chakrabarty warned that investments in gold by India’s poor denizens are “troublesome” and that the RBI has already been attempting to thwart the mushrooming of gold-based loans and gold coin sales activities at the nation’s banks.

He said that, “The problem is that [gold investing] has become a culture where the poor people are purchasing and ultimately, they are borrowing on that gold at 30 per cent [interest].” The RBI therefore sees the aggravation of the nation’s current account deficit as an unnecessary side-effect of the appetite for gold. This kind of “love trade”- if carried into the extreme- could turn into the “hate” trade, at least as far as India’s government is concerned.

Incidentally, India just elected its 13th President, Mr. Pranab Mukherjee yesterday. His election might be a “signal” to the RBI to keep up its efforts aimed at suppressing the nation’s appetite for the yellow metal. Mr. Mukherjee, you might recall, in his role as India’s Finance Minister, was quite recently very adamant about the maintenance of a newly instituted customs duty hike on gold, and he saw it as more than justifiable.

Most of the country’s jewelers and vendors went on a nationwide strike in March to protest the tariff increases on bullion. Mr. Mukherjee warned back then that “the import of gold of such magnitude [circa 900 annual tonnes] strains [India’s] balance of payments and affects exchange rate of rupee through impacting [the] supply-demand balance of foreign exchange.” This is a story we would advise following closely as it develops further. The gold market cannot, and will not, ignore what might result from regulatory changes or other restrictive measures in a country that normally consumes the kind of gold tonnage that it normally does.

Even if illicit smuggling were to flourish in India, as many predict, the net lost tonnage demand would yield a gold market under even more pressure to absorb surpluses via investment offtake.  One cannot yet estimate what the loss of, say, 450 tonnes of physical Indian demand would do to world gold prices, but, at the moment, the gold market requires more than $120 billion in constant annual investment demand to remain “afloat.” This means that nearly 2,400 tonnes of gold need to be mopped up by investment demand each year, and on an on-going basis to just maintain prices near current levels. As noted here recently, the net additions to investor gold holdings declined by nearly 6% in 2011 and they added up to only 1,067 tonnes. To be continued…

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