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Gold's year likely just got a lot worse.

A very important news article came out overnight on February 11 from India. The Indian current account deficit is projected to grow to historic highs in 2013. Reports NDTV:

RBI governor Duvvuri Subbarao today cautioned the country was headed for the highest ever current account deficit this fiscal year, after it rose to 5.3 per cent of GDP in the second quarter.

"We would not worry if the widening CAS is on account of import of capital goods, but here it is high on account of import of oil and gold."

Oil and gold are the two largest drivers of the current account deficit for India. As a growing economic power, India needs oil. However, gold is simply a drag on the economy. If the government wants to clamp down on the deficit, gold is likely the place where it would look to cut. But how much cut would be needed to bring the deficit to a level that is sustainable? Reports NDTV again:

According to both the government and the RBI, a 2.5-3 per cent current account deficit is sustainable, otherwise it can impact the balance of payments (BoP) position.

So there we have it. The Indian government needs a 3% reduction to its current account deficit. This amounts to about $55B, given that GDP is $1.85T. Assuming that half of the deficit reduction will come from gold imports, and at the current price of $1,650/oz, this amounts to a whooping 475 tonnes of reduction in Indian gold imports, or about a 60% reduction from the current levels of 800 tonne. In turn, this amounts to 10-15% reduction in world gold demand for 2013.

If this truly ends up being the case, gold prices will be under severe pressure. Prices stayed almost flat when India lowered imports by about 200 tonnes in 2012, as China made up for the gap. However, China imports will have to go up by more than 50% in 2013 if Indian demand were to drop by 60%, given that China still imports slightly less gold than India. And that, at best, will keep demand and prices flat.

So how did the market react to this? Reports NDTV again:

Gold prices today lost Rs. 210 to slip below the psychological Rs. 31,000 mark at Rs. 30,790 per 10 grams on heavy selling by stockists.

Investors were seen shifting funds from the weakening bullion to the strengthening equities, and retail customers refrained from purchasing as expectations of more corrections hit sentiment.

This is expected. Indians love gold, but they love returns more. If equities provide better returns, that's the direction Indians will go.

What does this mean for your investment thesis for the rest of 2013, dear reader? Well, my projection for gold prices (NYSEARCA:GLD) in 2013 remains unchanged, that shorting gold -- especially via the miners (GDX, DUST, NUGT) -- remains the play for 2013. For more details, please check out my other article titled "How Best To Short Gold - Miners Or Metal?"

In the mean time, I have initiated a position in DUST. I think the miners are really setting up to be perma shorts with falling gold prices and rising mining costs. I am up on this position by about 2%. I believe it is just the beginning and it is a matter of time till the miners see a steep drop. Of course, nothing is a guarantee, but the Government of India position gives me a good reason to believe that I will make money on this.

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 choices.

Source: The Real Reason Not To Buy Gold