Can India come to gold's rescue?
Last week's drubbing of the gold price has gold bugs and investors wondering what it could take for a turnaround.
On Monday, July 20, the gold price fell sharply during Asian trading hours with the price declining from a $1,134 close on Friday to an intra-day low of $1,086 an ounce – a 4.3 percent plunge.
The World Gold Council explained how nearly $2 billion of bullion was dumped in a matter of minutes:
"This fall was precipitated by significant trades on the Globex platform on COMEX and the Shanghai Gold Exchange (SGE). Trading data reveals that 4.7 tonnes (t) was off-loaded on the SGE at 2.29am BST – this is an exceptionally large amount in a short space of time. Normally little more than 40t trades in a day. At around the same time volumes spiked on COMEX. Both trades were made during periods of low market liquidity."
That 4.7-tonne sell order compares to an average on the SGE of just 96 kilograms a minute.
Gold's weakness has been blamed on a number of factors including looming interest rate rises in the US, disappointment over Chinese central bank purchases, a temporary resolution to the Greek debt crisis, weakness across the commodities sector and a stronger dollar.
Gold market watchers have seen this movie before, albeit the last time, it had a happier ending. In April 2013 when gold crashed 13 percent in two days, the largest gold consumers – China and India – saw the plunge as a major buy signal, with queues for weeks by Indians ready to cash in on cheaper gold jewelry. Could the same phenomenon happen again?
Looking at the Indian gold price, it doesn't look promising. While the Indian gold market did indeed tick upwards on Saturday, with both standard gold (99.5 percent purity) and pure gold (99.9 percent) rising, the price in India lost 3 percent of its value for the week.
On the other hand, according to a recent paper by Assocham, the Associated Chambers of Commerce of India, if gold falls to within the Rs 25,000 mark (US$390) per 10 grams it will trigger a "Buying Temptation Zone" for Indian retail demand. The association noted that gold futures for August delivery are already below that level.
“The enquiries among the consumers, mostly women, are increasing. As we near the festive and wedding seasons in the next few months, the demand for jewellery will pick up, boosting the overall sentiment, which of course is at a bottom now,” the paper said.
While that may seem comforting to gold investors – including holders of physical/paper gold and gold equities – another source wasn't nearly so sanguine. Carsten Fritsch, Commerzbank senior oil analyst, told the Reuters Global Gold Forum that India's gold appetite is sluggish, with only modest local premiums to the international spot price.
"That's really a bearish sign, when the main consuming region remains on the sidelines after such a price drop to a multi-year low," he said.
Kumar Jain, vice-president of the Mumbai Jewellers Association, observes that while the price slide has sparked some interest among physical gold vendors and buyers, it's nothing near the frenzy seen in 2013, when gold bars were selling at over $20 an ounce above the global spot price. "This is not a festive or wedding season, so interest remains low," he told Reuters. At least one Indian bullion dealer was quoted as saying that Indians are waiting to see if prices fall further.
Another factor working against gold in India right now is the country's lower inflation (at 5.4 percent, currently half the rate at the end of 2013 Reuters reported) which takes away gold's allure among Indians as a store of value against currency depreciation.
Nor can Chinese gold consumers be expected to flock to stores to buy jewelry, bars and coins.
"Fast-rising stock prices, a slowing economy and Beijing's anti-corruption drive, which has deterred some from making conspicuous 'luxury' buys, have all diverted money away from bullion," Reuters said last week following gold's latest crash.