Remember me

Register  |   Lost password?

The Trading Mesh

India and Gold – A special relationship

Mon, 30 Oct 2017 07:41:12 GMT           

Of all the precious metals, gold is continually proven to be the most popular for investors. It is often seen as the safe-haven commodity, where investors can run to in times of economic or global uncertainty. More practically, it is revered for its hedging properties, a way for investors to diversify their portfolio risk through future contracts or derivatives. 

The yellow metals unique complexity is how it combines the features of both a currency and a commodity. In many ways it operates more like a monetary asset despite its obvious tangible and real value. Yet, unlike other currencies it can’t simply be printed by any government. This inelastic supply is one reason it remains resilient to external market shocks. 

Instead, gold price is almost entirely driven by demand, and one of the biggest drivers of this demand is India. Simply put, Indians cannot get enough of the precious metal. Gold is deeply embedded in the culture of the country and plays many different traditional roles. 

Weddings are behind a great deal of this demand. Conservative estimates suggest there are at least 10 million weddings in India every year and the average gold consumption of an Indian wedding can be as high as 7 ounces, roughly 200 grams. According to the World Global Council, half of the nearly 900 tonnes the country buys is during the wedding season alone. 

On top of this, half the population of India is younger than 25, meaning the number of weddings in the country could double in the next five years. Demand for the precious metal for this reason is likely to follow suit. Other roles such as gifting to Gods contribute further. To quote just one famous example, the Sree Padmanabha Swamy Temple in Trivandrum was discovered to have over $22 billion worth of gold in its vault. The world’s single biggest treasure find. 

There is also the not so insignificant reason that nobody in India has ever experienced a bear market in gold. Despite the rupee losing much of its value over the last few decades. Indians have retained much of their purchasing power against the dollar because of their continued dedication to owning gold. It may be intrinsically linked with Indian culture, but gold has played a significant role in Indians preserving their wealth. 

It is however having the opposite effect on the wealth of the country. Since India imports nearly all its gold, the country is left with a current account deficit that weakens the rupee, a currency that Indians already deeply distrust. So, while Indians continue to invest their savings in the better performing precious metal, the banks continue to be weakened by not having the necessary funds for lending. 

The Indian government’s fiscal policy favour cheap borrowing, certainly instead of the high interest rates that encourage saving, but for largely bureaucratic reasons, less than a third of Indians have a bank account they can save with anyway.

This fact has done little to stop the government trying to crack down on gold ownership though. Previous attempts to impose import duties or incentivise gold deposits in banks have caused shocks but retained little long-term impact. Again, this would happen in 2016 when physical demand plummeted in India as well as in China, the two markets that make up nearly half the demand for Gold worldwide.     

A jeweller’s strike had reduced consumption in March ’16 after levies were introduced intended to tax jewellery made or sold in India. The country then faced a cash crisis when a government launched a surprise demonetization policy that made high-denomination currency notes invalid, the very notes key to driving the market of Gold.  

As a result, Indian gold imports crashed by 39% in March, compared to the same month in 2015, and the government’s plans to turn people away from their favourite metal looked like they might finally be beginning to work.

Yet, a year on and demand for gold in India is rebounding. After the seven year low of March 2016, demand in 2017 for the same month is up 582% to 120 tonnes, as optimism around the Akshaya Tritiya festival kickstarted India’s love for Gold again. And while 2017 will represent more of a transition year, India’s demand for gold can be expected to more than recover by 2018, where we could see a return to 800 tonnes. 

This could have a spectacular impact on the price of Gold. In recent weeks the yellow metals price has declined below $1,300 due to growing expectations that Yellen will again raise rates.  

But if the spot price manages to recover past the important threshold of $1,300, it will open the door for further recovery and if the first target of $1,350 is reached, there’s no reason a price move to the next resistance area of $1,375, the peak reached a few days after the Brexit vote, won’t follow. 

Carlo Alberto De Casa, Chief Analyst at ActivTrades and Technical Analyst for La Stampa. Carlo provides regular commentary for UK outlets including the BBC, The Telegraph, The Independent and Reuters UK. He is also a weekly commentator for CNBC Italy and author of Secrets for Investing with Gold.