India is the world's largest consumer of gold and silver jewelry, and is a rapidly increasing force in platinum jewelry sales as well. Jewelry there, however, is viewed not only as a thing of beauty as it is in the West, but also as an investment. People buy it, in many cases, to preserve their wealth.
On Tuesday, the Indian Central Bank surprised everyone by lowering interest rates by a full half-percent, which was more than expected. India's inflation rate is quite high at nearly 7% per annum. The Central Bank seems to be ignoring this and concentrating on growth even in the face of higher inflation. While some commentators have interpreted the central bank's comments about inflation to indicate that this is a one-off cut, I doubt it. It would be rare and unusual for a central bank to do a "shock and awe" rate cut like this one without intending to do more of them.
This may be a pattern many other emerging market central banks will follow. All of them are very worried about bolstering local economies against the turmoil in Europe, which is the biggest export market in the world. Other central banks are likely to lower rates in spite of high inflation. The natural response of Indians and others all over the world will be the traditional one. They will probably trade in their rupees, yuan, pesos and so on for hard currency like gold and silver as they have always done. Nowadays, in India at least, they'll also trade them in for platinum.
The normal increase in precious metals demand this move will bring would have been tempered by last month's increase in tax to 4%, except for the fact that the tax has already had its effect on prices. The current price is much lower than it was before. The negative effects of the tax are built into the current prices. And the All India Gems and Jewellery Trade Federation says it has assurances that the tax will be lowered. So far, however, we don't know exactly by how much.
This interest rate cut is probably the first in a series of rate cuts, perhaps in response to economic turmoil in India's export markets (EU). Whatever may be motivating it, interest rate cuts will stimulate buying activity not only in the jewelry sector, but also in the overall Indian economy, as cheaper money always does. That means increased demand for platinum, palladium and silver in the industrial sector as well.
So, who is next? Will China be the next emerging BRICs nation to ease monetary policy in order to stimulate its economy? It is already close to surpassing India as the biggest precious metals purchaser. How about Russia and Brazil? The current leveling off in precious metals demand has been brought about partly by rate hikes and policy tightening. A sharp reversal of such policies should also bring about a sharp increase in demand.
In the short run, the prices will be governed, as always, by the capricious whims of banks and hedge funds. Prices may be profoundly affected by opportunistic short sellers who take advantage of some entities that desperately need to raise cash. Such liquidations this time around, however, will be tempered by intense physical demand, at least in gold. Emerging market central banks are buying gold on all big dips. Bullion banks might otherwise like to play hard ball with paper market speculators. But they are going to have trouble with that when forced to supply physical gold to Asian buyers.
If there are any significant price dips, long-term investors should buy them. If platinum, palladium or silver experience bigger price dips than gold, you can be sure that part of the reason will be the greater ease by which those other metals can be manipulated. It is probably smart to shift your dip buying preference to those secondary precious metals if the swings are much bigger than the swings in gold.
The start of an interest rate cutting cycle in India, the probability of more rate cuts there, and the likelihood that other emerging market central banks will probably follow suit will be very positive for precious metals prices over the long haul. With upcoming intense turmoil in currency markets, the probability of more LTRO giveaways in Europe, and new quantitative easing episodes in America the picture becomes even better.
People can participate in the precious metals market in many ways. They can buy bullion bars and coins. There are a number of different bullion ETFs that facilitate investment in precious metals, including SPDR Gold Trust (GLD), Sprott Physical Gold Trust (PHYS), iShares Gold Trust (IAU), iShares Silver Trust (SLV), ETFS Silver Trust (SIVR), Sprott Physical Silver Trust (PSLV), ETFS Physical Platinum Shares (PPLT), and ETFS Physical Palladium Shares (PALL). Stock plays include Newmont Mining (NEM), Barrick Gold (ABX), Hecla Mining (HL), Prosperity Goldfields (PPG.V), Yamana Gold (AUY), and many others. Platinum and palladium companies based in southern Africa may not do well, however, even if the bullion does because of a combination of political, labor, and utility problems there.
Disclosure: I am long SIVR.