Could This Be The Peak For Gold Prices In India And Bottom For The Rupee?

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 |  Includes: GLD, ICN
by: Moneyline

Gold prices in India surged sharply to new record highs and past earlier peaks with MCX gold futures for Oct delivery on the Multi Commodity Exchange trading at 34,622 rupees per 10 grams Wednesday morning as the rupee again slumped to a new record by over 5% to 69.80 (Sept. futures) per U.S. dollar. MCX Silver for Sept. delivery shot up to 59,580 rupees at the time of writing. The rupee had a sharp downside impact today after, the Indian government on Monday passed a landmark bill through the lower house of parliament that expands the world's biggest food program that will give subsidized grain to two-thirds of India's 1.2 billion citizens. The plan involves spending about 1.25 trillion rupees ($19.5 billion) in subsidies each year at a time when the government is running budget and current account deficits. The rupee currency had weakened 32% since August 2008 till Tuesday, according to data compiled by Bloomberg. Premiums on gold prices in India have risen to over $35 per ounce over London spot prices due to a very robust demand but a lack of supply due to the massive curbs and import duty hikes levied in the past 12 months on gold imports. The World Gold Council estimates that sales will reach as much as 1,000 metric tons this year in both China and India, the world's largest buyers. The Indian rupee also fell towards record lows on Wednesday, leading slides among emerging Asian currencies with Southeast Asian units at multi-year lows as concerns over possible U.S. military action against the Syrian government dented risk sentiment. A widening current account deficit, slowing economic growth and strong resistance to implementing much-needed reforms have had a critically severe impact on the rupee valuation to the dollar in addition to an anticipated withdrawal or the so-called "Taper" in quantitative easing by the Federal Reserve. The wisdom of Indian housewives' belief in gold as a store of value is being seen after the rupee's rapid depreciation in recent weeks. Gold has risen or rather the rupee has fallen to near record lows against gold at over 98,153 rupees per ounce. Gold's earlier record rupee high was 97,129/oz on November 26, 2012. Gold prices in the world's biggest gold-consuming nation have surged 21.8% since June 30, according to data compiled by Bloomberg, while indexes measuring Indian bonds fell 6.4% and stocks dropped 4.5%. Indian investors will remain attracted to gold as long as inflation stays above 7%. Also the rupee has lost over 19.2% this year, the second-worst performance in Asia.

Gold inflows into the bullion markets (on profits booking) are expected to rise in India as prices have hit historic highs on the weak rupee. Gold prices today in dollar terms in India are to the equivalent to being above $2,000. Fresh demand for gold in India can be expected to be weak till rupee remains at record lows. This can, to an extent, have an adverse effect on global gold prices as well.

A rebound in the Rupee may cool-off Gold prices in India:

The Reserve Bank of India (RBI) was likely selling dollars via state-run banks, starting at 65.90 rupee levels after it hit a record low of 65.93, to prevent it from slipping further, three traders told Reuters on Tuesday. Traders, however, did not rule out the possibility of the unit hitting 66 to the dollar later in the session as month-end dollar demand from importers continues to pressure it down. Finance Minister P. Chidambaram said on Tuesday the government would stick to its fiscal deficit target for the year, while announcing cabinet approval of power and infrastructure projects worth 1.83 trillion rupees ($28.38 billion). The rupee has already been beaten down around 15% so far in 2013 despite frantic attempts by the government and central bank to shore it up. Overseas investors have sold about $810 million worth of shares in the previous seven sessions through Monday, adding to pressure on the rupee. In tandem with Emerging market trends, India's growth also has been losing steam and additional downward pressure on the Rupee makes it all the more difficult for RBI - India's central bank to add to its interest-rate cuts to support the economy and spur growth. Bond risk in India has also surged as the Rupee weakened sharply. The depreciation in the Rupee forced the Reserve Bank of India to refrain from adding to three interest-rate cuts this year that helped push the benchmark 10-year yield to a 44-month low in May. India has already undertaken massive measures to control the exploding current-account deficit by way of imposing major curbs on Gold imports - the second largest contributor to the deficit. Import duty on Gold has been enhanced to 10% from 2% in the last 12 months- a massive 500%. Though there is no clear sign of turnaround in the Rupee yet, I would now rather bet for than against it. While near-term depreciation risks remain, the downside may not be much deeper going forward and I expect the rupee to strengthen to 64 and then to 59.50 per US dollar in about 2 to 3 months. Also the long-term outlook for the notes is better as the RBI will probably resume cutting rates as and when the rupee shows signs of stabilizing and the emerging-markets' sell-off subsides.

The Fed's Taper talk effects Sell-Off in Emerging Markets:

There is a clear picture of interconnectedness of the global economy and financial systems. There are growing signs that the unwinding of the banks' trillions of dollars in QE interventions could be every bit as dangerous and volatile as the conditions that led them to take the actions in the first place. The mere hint that the Fed will slow the rate at which it injects new money into the system by buying bonds has driven a torrential sell-off of all sorts of assets this summer, driving U.S. interest rates up a full percentage point and prompting even bigger financial convulsions in emerging nations like India and Brazil. With ultra-low interest rates in place in most of the advanced, wealthy nations, investors have plowed money into emerging economies like Mexico, Brazil and India to earn higher returns. Now, the prospect of an end to the era of easy money is drawing that tide of money back out, leaving those nations with currencies falling sharply and interest rates spiking. Asian nations are depleting foreign reserves as they seek to bolster their currencies while investors pull billions of dollars from the region. Most sovereigns are likely to see economic growth weighed down somewhat by modest-to-moderate increases in funding costs. The strain is likely to be greater in economies that run sizable current-account deficits or have inflexible exchange rates. A total $7.6 billion flowed out of emerging-market equity exchange-traded products in the first seven months of this year, according to BlackRock Investment Institute, a unit of BlackRock Inc., the world's largest investor.

Now that the Fed is moving toward shuttering its bond-buying program, currencies in emerging markets have begun to plunge and there are growing fears of a possible crisis. The recent sell-off in emerging markets is a classic case of being careful what you wish for. The risk of these pressures snowballing into a crisis that engulfs the world economy was the focus of much of this year's Federal Reserve conference at Jackson Hole, whose theme was the global dimensions of monetary policy. Central bankers from around the world attended the conference, which wrapped up on Saturday, and their conclusion was not startling: unconventional monetary policy in developed nations such as the United States, while appropriate for domestic objectives, can have big spillover effects. And, for better or worse, these policies - such as the Fed's bond buying and near-zero interest rates - have spurred the need for developing countries to create their own unconventional tools to control monetary flows. But there was disagreement as to the degree central bankers in rich nations should pay attention to the overseas impact of their policies, as opposed to simply focusing on the economic goals of their home country, as has been traditionally the case. The discussion veered from the ripples of Fed policy into what emerging states can do to insulate themselves. Christine Lagarde, managing director of the International Monetary Fund, agreed capital controls might be needed in certain circumstances but said they should not be a first line of defense. Many analysts worry about the efficacy of such policies, given a long history of failed currency interventions around the world that often, by revealing a country's financial weakness, have attracted speculators rather than deterred them.

Policymakers speaking to various television networks at the conference offered few hints on the likely timing of an eventual pullback in asset purchases. Susan Collins, an economics professor at the University of Michigan, questioned markets' conventional wisdom that a September reduction in bond buys was a certainty. "I think September is too soon. I don't think it's a done deal," she said.

Higher Comex gold prices expected on dollar weakness:

On the other hand, hedge funds and other speculators raised bets on higher COMEX gold prices to the most in six months as signs of slowing U.S. growth drove bullion above $1,400 an ounce for the first time since June. The net-long position increased 29% to 73,216 futures and options by Aug. 20, U.S. Commodity Futures Trading Commission data show. Short contracts fell for a second week and to the lowest since Feb. 12.

During a 12-year bull market, international gold prices surged more than sevenfold. After peaking at $1,921.15 an ounce in September 2011, gold prices fell to $1,180.50 in June, the lowest since 2010, before recovering to $1,406 on 23 August. Gold prices jumped last week to a 11-week high, topping $1,400 an ounce in spot trading, as sales of new U.S. homes fell more than forecast, boosting speculation that the Federal Reserve will maintain economic stimulus. Meanwhile U.S. durable goods orders on Monday reported their biggest drop in nearly a year in July, but the highly negative data barely changed views that the Fed may dial down its stimulus program as early as next month. "Physical demand is very strong, and that is lending support to prices, and we think it's time to increase our holdings," said Michael Mullaney, the Boston-based chief investment officer for Fiduciary Trust Co., which manages about $10 billion of assets. "The economy is improving, but there are some misses, which intensify the debate on tapering and increases demand for gold as a safe-haven investment." Policy makers are weighing when to begin curbing $85 billion of monthly bond purchases that they pledged to maintain until the job market improves.

Contradictory market views on gold prices:

Gold's rally probably will fade by the end of the year as the dollar strengthens, bond yields rise and investor faith in the metal as a store of value wanes, Morgan Stanley said in a report dated Aug. 22. Prices fell 17% this year, heading for the first annual decline since 2000. Bank of America Corp. predicts a fourth-quarter average of $1,495 and JPMorgan Chase & Co. anticipates rising averages in every quarter through the end of next year.

What is happening in India is a prelude to what will be seen in other economies in the coming times as currencies depreciate.

It is it hard to believe that Bernanke is not aware of the dangers yield spikes have on financial markets historically, which likely means the Fed either will not taper, or taper marginally to calm interest-rate movement. That means the Fed, because of its paranoia over an end to the wealth effect, may try to push for a negative real-rate environment again, whereby inflation is higher than nominal interest rates. This may be what gold is sensing. Gold prices tend to historically show strong momentum when in negative real-rate environments.

The long-postponed and unresolved US budget-deficit conflicts within the Congress and with the White House are likely to surface anew around September. What is being played out here is still part of the fiscal-crisis confrontation of July and August 2011, which almost collapsed the US dollar and brought about a downgrade in the sovereign credit rating of the United States. The issues never were resolved. They were put off until after the 2012 election, and other than for minimal sequestration, they remain in play, going into a post-Labor Day 2013 showdown.

The Huffingtonpost article said -

In a Monday letter to House Speaker John Boehner (R-Ohio), Treasury Secretary Jack Lew said latest estimates show the U.S. hitting the debt limit by the middle of October. "Protecting the full faith and credit of the United States is the responsibility of Congress because only Congress can extend the nation's borrowing authority," Lew writes. "Failure to meet that responsibility would cause irreparable harm to the American economy."

The U.S. Treasury is on track to hit the debt limit by mid-October, the Wall Street Journal reported Monday.

The report provides a more specific timeline than previously cited by Treasury officials. Previously, Treasury Secretary Jack Lew said he anticipated the U.S. would not hit the debt ceiling "until Labor Day."

"The uncertainty caused by putting this off is not good," Lew said in May. "The anxiety caused to the U.S. and world economy by putting this off until the last minute is not good."

The Wall Street Journal reports:

The mid-October timeframe is sooner than many on Capitol Hill had anticipated. The government hit the borrowing limit several months ago, but Treasury has used emergency measures-such as suspending certain pension contributions-to buy more time for Congress to act. Some believed that the government's improving fiscal condition-bolstered by rising tax revenue and money coming in from Fannie Mae and Freddie Mac-could give Treasury even more time, potentially until sometime in December.

Last week, Lew called on Congress to raise the debt ceiling, urging lawmakers to "avoid another unnecessary self-inflicted wound" ahead of the Treasury exceeding the limit.

"We cannot afford for Congress to wait until some unknowable last minute to resolve this matter on the eve of a deadline," Lew said.

As Reuters reported last week, House Republicans have floated using the debt limit as leverage to defund President Barack Obama's healthcare reform law.

Conclusion:

International investors are exiting Asian and other emerging markets on speculation that the U.S. Federal Reserve will dial back its monetary stimulus programs this year, reducing the amount of capital circulating in the global economy. Meanwhile, as all of this chaos is unfolding, Western central planners are desperately trying to avoid the inevitable collapse that is coming. Western central planners know that a massive surge in the gold prices would reveal the true nature of the rot that is taking place in the financial system. So they are now clearly fighting a losing battle in the gold market, and this will be seen as just another delaying action over time as they ultimately retreat in defeat.

All are fully aware by now, there is a severe shortage of physical gold in the Comex and the other Bullion Banks as gold continues to flow from the west to the east. Investors from the west, even if completely bullish in gold (whenever they may become), may now not get highly bullish on paper gold anymore on lack of trust thus induced. They would prefer to hold physical gold, which has to be fully paid up for in contrast to the highly leveraged paper gold markets. This will as an effect, reduce the expected numbers of net long positions on a historical scale but that will not project a lack of trust or bullishness in gold but a complete lack of trust in the system due to the "Collusion of the Crimex and JP Morgan lead Bullion Bankster Gangsters." Meanwhile Gold in dollar will overshoot all expectations.

So where do they now invest?

Remember - Diversification is probably an irreversible trend and it may slow down short-term but it's unlikely to reverse. The trend of investment in the emerging markets thus, is witnessing a temporary setback, but this reversal of funds is certainly not the future. Real-Money and not borrowed funds trickling out of weak home markets will once again start flowing into emerging markets and this time it will be as a hedge against down-slides in home markets of these developed nations. The Fed will either not taper at all, or taper marginally and temporarily to calm the interest-rate movements for the moment. That's it!

This money coming back into emerging markets will help stock markets and these currencies strengthen again, keeping gold prices lower in these markets while in the dollar terms… Whoosh! Time will tell.

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. I have no business relationship with any company whose stock is mentioned in this article. I have booked most of the gains in gold in Indian rupees, but holding some yet. I have booked small gains in silver, holding most and also waiting for price dips to again buy more.