Commodity Review: Should You Buy Gold With The Indian Government Trying To Cool Gold Purchases?

Apr. 30, 2012 12:31 PM ETGLD, GDX, GDXJ
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Weakness in the dollar and the economic data coming out of the US was prompting a second look at gold but India, the world's biggest gold buyer, is trying hard to cool gold buying. Specifically, the dollar and gold tend to move in opposite directions and the dollar briefly fell to a two-month low earlier in the day against a basket of currencies as signs last week increased that the US economic "recovery" is loosing speed (The dollar appears to be making a rally in later trading).

However and if you are thinking of getting back into gold or adding more to any gold investment, its important to take a closer look at what is going on right now and in the near future in India. A weak rupee combined with high inflation was making gold more expensive for Indian consumers but then in January, India doubled its import tax on gold to 2% while in March, it proposed increasing the tax to 4% plus adding an excise tax on the sale of most gold jewelry in order to discourage demand because gold imports were widening India's current account deficit (After crude oil, gold is the country's second largest import). The March proposal caused gold traders to go on strike and the government is said to be reconsidering the proposal.

Moreover, gold sales were lower-than-expected for last Tuesday's Akshaya Tritiya, the second-largest gold buying festival in India with sales halved to 10 tonnes from the previous year. That helped to spark HSBC to cut its average gold price forecasts for 2012 by 5% to $1,760 per ounce from $1,850 an ounce and to cut its 2013 price forecasts to $1,775 an ounce from $1,800 an ounce. Nevertheless and despite the recent weakness, HSBC does maintain an "upward bias" for gold and the bank is expecting gold prices to recover in the second half of this year.

On the other hand, the Wall Street Journal has noted a worrying sign for gold bugs in that fund managers appear to be less interested in holding gold as managed money funds have seen their net long exposure to gold sink to its lowest in three years.

Nevertheless and for investors looking for an easy way to have direct exposure to the price of gold, the SPDR Gold Trust ETF (GLD) is a good option as it attempts to reflect the price of gold bullion by investing by holding actual gold. Otherwise and for investors who would rather invest in gold mining stocks rather than a fund holding gold itself, the Market Vectors ETF Trust (GDX) attempts to replicate the price and yield performance of the NYSE Arca Gold Miners Index (GDM) while the Market Vectors Junior Gold Miners ETF (GDXJ) will attempt to replicate the price and yield performance of the Market Vectors Junior Gold Miners Index which is made up of small cap gold mining stocks.

However and after mostly rising for the first two months of the year, the Market Vectors ETF Trust (GDX) is now down about 10% since the start of the year while the Market Vectors Junior Gold Miners ETF (GDXJ) is down around 6.75%. Meanwhile, the SPDR Gold Trust ETF (GLD) is actually up 5.8% or so since the start of the year - meaning investors would have been better off investing more directly in the commodity itself rather than the companies that mine it.

Of course, it's conceivable that there can be less risk with owning the Market Vectors ETF Trust (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ) as inevitably many of the stocks that make up these funds will also be mining other metals and commodities - meaning more diversification. On the other hand, this diversification has its pitfalls and in some circumstances can make things more risky.

Hence and when investing in anything related to gold or gold mining, do your due diligence to ensure that understand what you are investing in and what risks you are exposed to. Likewise, remember that the price of gold is influenced by more than just what is happening to the dollar and economic uncertainty in the west.

Finally, keep an eye on our stock forecasts for the SPDR Gold Trust ETF (GLD), the Market Vectors ETF Trust (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ). While we obviously cannot forecast what the demand for gold will be in India, we can help you make better daily trading decisions for both gold and gold mining stocks.


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