Gold, India, Bernanke and the desire for upwards momentum
David Levenstein advocates that investors continue to buy gold now, before governments have the chance to do something stupid
Posted: Tuesday , 03 Apr 2012
Recently, while giving a speech to the National Association of Business Economics, the Chairman of the US Federal Reserve, Ben Bernanke, said that the U.S. economy needs to grow more quickly to bring down unemployment thus defending the central bank's policy of very low interest rates. Within minutes the gold price spiked. It reminded me of a commercial in which the main character who is talking about trading forex says. "It all depends on what Bernanke had for lunch." But, in this case it must have been what Bernanke had for breakfast because it was early morning when the price of gold surged more than $20 an ounce in less than 30 minutes. The price of spot gold jumped from around $1660 an ounce a few minutes after 0800 am New York to trade above $1680 an ounce in less than 30 minutes.
While Bernanke made no specific reference to a third round of bond purchases in his speech, he hinted at the possibility of more quantitative easing but without actually promising any more. He also made clear the Fed is in no rush to reverse course after responding aggressively to a deep recession.
Bernanke said the recent decline in the jobless rate, which dropped to 8.3% in February from 9.1% last summer, was "somewhat out of sync" with the rather modest pace of economic growth.
"To the extent that this reversal has been complete, further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," Bernanke told the National Association for Business Economics.
A little more than a week later, gold prices slipped back slightly. It seems that the main reason for the softer prices was the lacklustre demand for the physical metal from Asian countries, in particular India, which has seen a strike in the jewellery sector.
India's jewellers went on their first strike in seven years on March 17, to protest a doubling of taxes on gold imports to 4% and a 1% excise duty on jewellery in the government's budget plan for the coming year which starts in April.
In his budget speech, Indian finance minister, Pranab Mukherjee, said that that the government will tax gold bars and coins and platinum at 4% beginning on April 1. The excise tax on refined gold also climbs to 3% from 1.5% and the government will also levy a 1% excise duty on non-branded gold jewellery, the minister said. He also said that jewellery purchases in excess of 200,000 rupees will attract a 1% tax from July 1.
India doubled the tax on gold and silver on Jan. 17 by imposing a levy on imports as a percentage of the price, compared with the previous system of tax by weight. The import duty on so-called non-standard gold doubled to 10% and the levy on ore, concentrates and so-called Dore bars doubles to 2%, Mukherjee said in his speech.
Of course this prompted major protests from India's jewellers. All India Gems and Jewellery Trade Federation (AIGFTF) led the protests to complain about the 2% increase on basic customs duty on standard gold bars, gold coins and platinum that is proposed by the Indian government.
Prithviraj Kothari, the president of the Bombay Bullion Association, one of the largest trade groups representing the industry in India was widely quoted in the Indian media as saying that the taxes would lift retail prices by 6% which would have a huge impact on demand.
Last Tuesday, the Indian, Finance Minister Pranab Mukherjee said he might reconsider the inclusion of so-called "non-branded" jewellery in the excise tax. Then, finally, on the weekend the government said that it will delay the implementation of an increase in excise duty on non-branded ornaments.
"We have appealed to our members to open shops from April 2 after the government assured us that no jeweller will be forced to register to pay excise duty," said Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation. "The finance ministry has written to us saying that no coercive action will be taken."
Even though gold imports by India plunged by more than 50% to 125 metric tons in the fourth quarter 2011, the country remained the largest buyer of physical gold in 2011. Demand for gold is traditionally very strong during the October-December period due to the Indian festival and wedding season, and usually the demand in the last quarter is more than the demand in the third quarter.
While there are some conflicting reports regarding the total quantity imported in 2011, Prithviraj Kothari, said that India imported 878 metric tons of gold in 2011, down from 958 metric tons in 2010. Other reports suggest that the figure was around 969 tons which was an increase over 2010.
According to Prithviraj Kothari, president of the Bombay Bullion Association, India's gold imports will drop as much as 59% to about 125 tons in the three months through March of this year. However, demand is expected to pick up during the second quarter.
According to the World Gold Council (WGC) Indian gold demand has grown 25% despite a 400% rise of the rupee in the last decade. The World Gold Council research shows that by 2020 cumulative annual demand for gold in India will increase to excess of 1200 tons.
India's continued rapid growth which will have a significant impact on income and savings, will increase gold purchasing by almost 3% per annum over the next decade. Ajay Mitra, Managing Director, India and the Middle East, World Gold Council, said. "The rise of India as an economic power will continue to have gold at its heart. India already occupies a unique position in the world gold market and, as private wealth in India surges over the next ten years, so will Indian demand for gold."
"In parallel to growth, socio and demographic challenges will need to be addressed given its immense diversity. This also applies to the gold market. Nevertheless, gold purchasing will continue, underpinned by India's long-standing and deep cultural affinity for gold; a love affair which transcends generations and makes India unlike any other gold market."
Evidently, Indian households hold more than 18,000 tons, the largest stock of gold in the world, and there is no doubt in my mind that we will soon see a resurgence of demand from India which will underpin prices.
While traders may wonder what Bernanke had for lunch, investors remain focused on the bigger picture. Whether or not, the US Fed embarks on another round of quantitative easing, the price of gold is headed higher. While the price of gold is off its recent high recorded earlier this year prices are still up on the year. However, as the media attention focuses on global equities and bonds, and gold is ignored, investor sentiment has waned slightly. This is not unusual and a phenomenon that persists in all types of investments. While prices consolidate, and trend sideways, individuals lose interest. What they want to see is upward momentum. Like sheep, they prefer to follow a trend. But, usually, by the time they have convinced themselves that the trend is upward, it is due for a correction. Prudent investors have the uncanny ability to see the longer-term picture and never get side tracked by short-term fluctuations. They also use these dips to accumulate more.
When it comes to investing in physical gold, these smart investors know that the bull market for gold remains firmly intact and that the fundamentals driving the gold price have not changed in the least. If anything, they appear more bullish now than they did a few years ago. The macroeconomic picture has not improved. The problems in the global monetary system are no further from being resolved than they were a few years ago. In fact, they have gotten worse as the level of debt has soared in the last three years or so. And, the usual geopolitical factors have not improved in the least, and suddenly Iran has taken over from Iraq.
As the flow of money goes into gold and silver and not back into the regular banking systems, governments will try anything to curtail this. They will impose, taxes, duties, exchange controls etc. And, whenever governments try to restrict the flow of money going into gold and silver you can be sure that their countries have a failing currency. It is important therefore to add gold to your portfolio before governments do something stupid and drastic such as prohibit or restrict the purchase of gold by individuals.
Gold prices continue to consolidate with prices stuck between (R) $1675 an ounce and (S) $1625 an ounce. I still maintain that this neutrality in prices has an upward bias and we will see a break to the upside shortly.
About the author
David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.