With India doubling down on gold, supply is ever tightening

There’s no two ways about it: Indians are enamored with their gold. For wedding, for holidays, for any number of celebrations, they snatch up the yellow metal at every opportunity. This “Love Trade” will always hold in India. But today a new force has been added to the equation, and it is proving to create even more demand for gold in the country: fear. As Indians double down on their desire for gold, read in this week’s Market Update how gold’s prices could be impacted.

"The Love Trade shines on. Like gold, the Love Trade doesn't tarnish; it holds its luster." – Frank Holmes

There are no two ways about it: Indians are enamored with their gold. For weddings, for holidays, for any number of celebrations, they snatch up the yellow metal at every opportunity. So when considering the ebb and flow of global demand for gold, those who don't account for India's infatuation are missing a huge piece of the picture.

While the "Love Trade" will always hold in India, today a new force has been added to the equation, and it is proving to create even more demand for gold in the country (and tightening supply elsewhere): fear.

India's currency, the rupee, is plummeting in value. It has lost a staggering 18% against the dollar since May. Inflation has set in at rapid pace, with even the basic onion – a staple in Indian cuisine – increasing in price by 144% since last year. As confidence in the rupee free falls, Indians of all walks of life are scrambling to take on more gold. No longer are they buying only out of love; now Indians are also buying out of fear. By doubling down on what was already an insatiable desire, demand for gold in the nation has increased 29% in just the past year.

The Indian government can't stand for this flight to gold; their people's faith in the rupee is critical. As Indians lock up their savings in gold, liquidity in the nation is drying up, so the government has taken a number of steps in 2013 to force confidence in the rupee, such as increasing duties on gold imports and banning other imports altogether.

Yet the more the Indian government tries to tighten the screws on gold, the more its people want it: in the second quarter of 2013, in the face of these ever-tightening restrictions, gold demand in India increased 70% over the same period last year.

As Indians double down on gold – first out of love and now out of fear – the global dynamics for its demand is undergoing a seismic shift. India already accounts for an amazing 29% of global demand; as their appetite increases even more (right as we enter their wedding season, no less) gold's supply will continue to tighten, which could send prices much higher in the coming months.

Gold and silver have already seen significant recovery from their recent lows in June, but with demand in India surging, with Quantitative Easing still moving ahead at full force, with currency wars still raging around the world, there are many reasons to believe that they can still increase in value by much more. It's not too late to start so that you too can protect your savings from our own currency's loss in value. Call us now to get started.

Precious metals on the move

London Fix PM price at week's end, and change over previous Friday:

  • Gold: $1,377.50, up 0.6
  • Silver: $23.06, up 1.0%
  • Platinum: $1,538.00, up 0.9%
  • Palladium: $752.00, down 1.3%

In the news

Gold prices to "recoil as if a compressed spring"
"Even in the face of high inflation, a financial crisis, a slowing economy and vanishing jobs, Indians are still flocking to the shops to buy physical gold... The story is similar in China, the Middle East, Singapore, Hong Kong, Malaysia and Indonesia. All across Asia, physical demand for gold has increased since the collapse of the gold prices. So while major banks and hedge funds here may have manipulated the markets, the Asian masses are buying up gold. This trend is not about to stop now or anytime soon. As a result, gold price manipulators will at some point give up on keeping the prices down and walk away... At that point, gold prices will recoil back as if a compressed spring and we will see a massive rally in gold." – Ashish Advani, Moneynews (link)

West is running out of physical gold
"We've been sitting through four to six months of severe weakness in the gold price, and this was after a two-year correction in what, to me, still looks like a secular bull market. I think we have now reached a point in time where the real selling is done, and I strongly believe that for the holders of gold – the people who really understand the gold story – the next six months are going to be far more enjoyable to sit back and watch for these gold bulls. The time for gold to really shine is now upon us, and that means much higher prices in the future." – Grant Williams (link)

If you don't know where the dollar is going, "you want to buy gold"
"We feel that there's at least a technical bounce here. If you're still uncertain about whether the financial crisis is truly over, then having some gold in the portfolio makes a lot of sense. That comes back to one of the key attractions of gold. It is a currency which is nobody else's liability. And so, if you have a situation where you're scared about where your currency is going, you want to buy gold. And if you're scared enough, you don't care what you pay." – John Bridges, JPMorgan Analyst (link)

Gold flowing from West to East
"Half of the world has been driving gold down, selling it hand over fist. The other side, in India and Asia, is buying just as vigorously and is also willing to buy at much higher prices. Since the June 27 low, the price of gold has moved upwards towards equilibrium between these two forces... Western speculators and bullion banks that have been leasing gold have created a gold price that seems inconsistent, to me, with the level of demand in the world. So I think that gold will reach a higher price level than today." – Brien Lundin, publisher of Gold Newsletter

Tapering is "like kissing your sister"?
"Tapering is just like kissing your sister. It just seems to me very unlikely that an action can take place without a substantial collateral damage in the financial markets, and I think that's the real reason to own gold." – John Hathaway, Tocqueville Gold Fund Portfolio Manager (link)

Spotlight on Silver

Silver was oversold, still a good time to get in
"The run we've seen so far [for silver] is merely a reflection of deeply oversold conditions. I think the fundamentals are of course favorable for gold and silver, but the first part of the move that we've seen is a reflection of deeply oversold conditions... If you're buying silver to preserve your purchasing power over time, or maybe to get a little alpha over the gold trade, then by all means this is a fair time to get in the market." – Rick Rule, Sprott USA (link)

Is a silver bull market underway?
"One of silver's biggest components for use is industrials and we think that that's really what has given silver a decent shovel off... There is one good way to get yourself on the radar, and that's to have a good price rally, all the speculators pick up on it and it then become self-feeding." – David Lennox, resources analyst at equity-research firm Fat Prophets (link)

Chart of the week

There's no discounting the massive demand for gold from India and China
china india dominated gold demand in 2nd quarter 2013

BGG - CTA Option 2

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