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08/25/2010

The Bullion Report

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August 25, 2010 in 'The Bullion Report'

India's Metal MojoIndia's Metal Mojo

The first 2010 quarterly report from the World Gold Council (WGC) pointed to expectations for continuing strong demand for gold from Asia. With global financial crises and flagging recovery in Europe and the United States, the WGC concluded that jewelry and investment demand remains firm, If this potential strength, despite higher prices, is expected to stem from countries like China and India, what signs are worth watching for?

Past performance is not indicative of future results.
***Chart courtesy Gecko Software's Track n' Trade Pro

 

India’s festival season is just around the corner, what does that mean for gold?

It should come as no surprise that a lot of the news and rumors surrounding India’s gold demand hinge on the important festival and wedding seasons. Long considered the pinnacle of import and retail jewelry demand, these gift-giving occasions are going to be the focus for the balance of 2010. The recent price dips in precious metals offer even more opportunity for demand to pick up from last year since importers may look to buy at these levels before the season is in full swing.

Depending on the sources, there is a critical news window for Indian gold demand that spans from August until November. Rakhi or Raksha Bandhan kicks off the festivals, however, this August celebration is likely more for modest gifts honoring the relationship of brothers and sisters. Diwali, in November this year, is likely the greater focus of gold demand since the “festival of lights” involves many days of celebration, the first of which is considered an auspicious day to purchase precious metals. Exchanging gifts of jewelry is also considered highly favorable during this celebration. So what does it mean for gold demand this year? In 2009, the global slowdown pared into the demand numbers from the year prior. Overall, the consensus has been that 2010 will see a recovery of that demand. The one caveat will be the early delay in the onset of monsoon rains, a trigger that will be seen as a chance that farmers will not indulge in the same level of jewelry investment. However, the monsoon rains have been beneficial thus far, suggesting that the accompanying production of crops would still deliver the disposable income for people to demand precious metals.

Past Demand

Gold demand from India accounts for a large percentage on a global scale. According to the first quarter demand trends outlook from the World Gold Council, the 2009 accountings for India’s share were 25% of gold jewelry demand, 19% of retail investment demand, and 17% for other demand.

The following chart illustrates the recent gold demand history in India, in metric tons:
 

 Past performance is not indicative of future results.***Chart courtesy of World Gold Council

As the chart shows, the overall tonnage headed to India is not minor. In the first quarter of 2010, total demand was already nearing 200 tonnes.1

What happens to silver during this same time?

Silver, as well as gold, is often viewed as a hedging tool to rural Indian buyers. Demand from this group of consumers is based on the idea that the precious metals are more accessible investment tools and more secure than just the Rupee. Silver may not enjoy the same lofty status as gold for this kind of investment, but the demand is still there. In 2008, India was importing over 4000 tons of the white metal, including some for industrial applications.2

This total dropped following higher silver prices, but looks to have potential to rebound if investment and jewelry demand remain strong, especially among farmers. According to the Silver Institute, the growing silver jewelry demand in Asia, led by India’s fabrication, has offset any losses from other global areas.3

This higher fabrication could mean support for higher prices.

  Past performance is not indicative of future results.***Chart courtesy Gecko Software's Track n' Trade Pro

Summary

For years, the growth in Southeast Asia has been the perceived catalyst for supportive gains, not just in precious metals prices, but across many commodity prices. Unfortunately, the global economic meltdown pared some expectations. The flip side is that the ripple effect from this meltdown has also triggered an exponentially large gain in the gold investment arena. The uncertainty that comes with some recent dropping sovereign credit ratings means that hedging currency risks and finding alternatives for investment remain high priority. For countries like India who are still projected to see gains in their GDP, a leg up economically could support bigger investments in precious metals.

The import of the second half of the year as it pertains to precious metals demand is clear. The bigger picture also shows that the rebound over last year’s consumption puts the Asian nation on course for demand levels to potentially meet or exceed the large numbers seen in 2008. Pair this with a strengthening rupee or a weakened US dollar, and there is a recipe for gold and silver to move higher. August, and the crucial festival season, are upon the market, which means getting ahead of the crowd on the gold import news will be pivotal to play the potential for this year’s sales to celebrants to exceed last year’s slower pace.

Gold is a treasure, and he who possesses it does all he wishes to in this world, and succeeds in helping souls into paradise. - Christopher Columbus

 


1. www.gold.org
2. http://www.commodityonline.com/news/In-rural-India-Silver-is-a-hedge-against-inflation-12475-3-1.html
3. http://www.silverinstitute.org/supply_demand.php


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.