Can Gold Survive Lack Of Demand In India?

Includes: GDX, GDXJ, GLD
by: Macro Investor

India consumes about 25% of the world gold demand, and these days it is buying less and less of the yellow metal.

India has historically been the country that drove world gold demand even when there was no rush to gold in the Western world. Indians have strong cultural and economic reasons to buy gold. The economic reason is straightforward. Inflation in India has been high for a long time, in the 5-8% range. Gold is therefore seen as a store of value. There are also strong cultural reasons, in that Indian brides are supposed to be gifted gold jewelery. Coupled with the fact that in rural India there are very few financial institutions (though that is changing) and hence fewer opportunities for alternative investments, gold has for a long time been the store of value for Indian families, especially from the rural regions.

It helps to note that India is still by and large a rural country.

However, this level of gold consumption puts the Indian government in a sticky situation. India produces very little gold locally. It imports most of its gold, in the 2011/12 fiscal year gold imports amounted to $58B. Let's put this $58B number in context. It is about 3% of the Indian GDP. In contrast, India imported about $140B in oil in 2011/12. Oil is vital for the growing Indian economy as India aims to become a first world country in the next several decades. Gold, well, is not. To add to the problem, India has a persistent current account deficit. It goes up and down, but off late it has been around 4% of GDP per quarter, or about $17B.

Naturally, the Indian government doesn't like this, so it has taken some steps to stop the gold import. It raised import taxes to 10%, which means now a gold investor has to wait for more than a year at current inflation rates for the investment to make sense. More importantly, it banned banks from issuing loans for the purpose of buying gold.

So, gold demand has promptly collapsed in India. In 2011, India imported about 1000 tonnes of gold. The 2012 numbers are looking like 800 tonne. and in 2013? Well, the projections are 550 tonnes, a whopping 45% decline from 2011 levels.

Nov 6 (Reuters) - India's gold imports may fall to 550 tonnes next year from a peak of 967 tonnes in 2011, the head of a leading trade body said, after a drop that could be as steep as 45 percent this year as high inflation and prices bite into disposable incomes.

India's 2011 imports put it ahead of China as the world's largest gold buyer, but they slid over 56 percent in the second quarter of this year after New Delhi hiked import duties. Overall first-half imports fell 20 percent.

"The demand (imports) for next year is expected to be about 550 tonnes (NYSEARCA:AND) may drop further if there is an increase in customs duty," Mohit Kamboj, the newly elected president of the Bombay Bullion Association, told Reuters Gold Forum on Tuesday.

When the entity that buys 25% of global demand decides to slim that down by 45%, I posit prices will follow suit. However, I also know how the gold market goes. It is not in any way based on fundamentals, and is all about sentiment. So, I am not about to short gold, but I must say I am sore tempted.

For those strong at heart, a few short choices may be the SPDR Gold Trust ETF (NYSEARCA:GLD), the Market Vectors Gold Miners ETF (NYSEARCA:GDX), and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice.