I talk a lot about "strong demand for gold". It's a crucial part of my investment case for investing in miners. For example, I recently covered research from Sprott Asset Management which shows that gold demand is hugely understated by the official figures.
In an open letter to the World Gold Council, Sprott said, "demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia".
So what does this "demand from Asia" look like? Who's buying all this gold?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Well, India is the world's second largest consumer of gold. Today I want to show you what's happening there. And what it means for your investments.
As I'm sure you're aware, gold is held in very high regard throughout India. Like here, gold is an important asset class. But it goes deeper than that. Gold is an important part of Indian culture. It's used a lot in weddings and other ceremonies.
Gold and the Indian economy
In fact, demand is so strong that gold imports have been blamed for India's huge current account deficit. A current account deficit is created when a country imports more than it exports. That puts downward pressure on the value of its currency. And a weak currency hits consumers with inflation and more expensive imports.
Indian rupee / US dollar exchange rate
Source:www.xe.com
Indian gold imports accounted for a staggering $56.8bn of their $88bn current account deficit in 2013. That made gold a natural target for the government. They gave gold both barrels, imposing a highly punitive import duty. The duty on gold jewellery has now risen from 2% in January 2012 to the current level of 15%.
Has this quashed demand? Absolutely not. Indians only want the physical metal and are prepared to pay over the odds for it, even if it results in smuggling which is now reaching epidemic proportions.
"Haresh Soni, Chairman of the All India Gems and Jewellery Trade Federation, which represents over 300,000 jewellers in the country, said that there was a pressing need to relax the curbs as the industry had witnessed a massive spurt in gold smuggling. He added that the industry had lost over 30% business in the last six months."
The combination of this punitive tax and smuggling has resulted in Indians paying over a 20% premiumabove the increasingly irrelevant paper price to get their hands on the real thing.
Source:www.goldchartsrus.com
It's a great example of what happens when paper gold is not enough and the general public the 'retail' market start clamouring for it. When the rest of the 'retail world' starts waking up to the importance of gold then this premium could move dramatically. And that would further undermine the paper market.
This article was first published on 20/10/2013 in the Metals and Miners newsletter.
Metals and Miners is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Customer services: 0207 633 3600.
-
Trouble brews in B&M as bargain shops take a hitOpinion Once a stock market darling, B&M's share price has slumped. What has gone wrong for bargain shops?
-
US and China reach a ceasefire in their trade war after talks in LondonThe US and China's trading relationship – the most important one in the global economy – is back on track. Will the truce last?
