Summary
The ‘Indian Fantasy’ is what I call the thesis suggesting that gold will enter a long-term bull market based on Indian demand.
The Indian gold market is isolated, over-regulated, and the factors people assume to be at play are not playing out as expected.
Over the short term, at least, I expect no positive impact on gold prices because of Indian physical demand.
Physical Gold and the SPDR Gold ETF (NYSEARCA:GLD).
Images: Beach Bridesmaid Dresses
There is a familiar narrative in the gold community. It suggests Indian demand will lead to a long-term rally for gold as the country grows in wealth and purchasing power.
I call this theory the ‘Indian Fantasy’
The Indian fantasy is plausible because, even as a relatively poor developing nation, India consumed 668 tons of gold, a third of global demand, in of 2015. One can assume that as the country’s wealth increases, so will its consumption – leading to a doubling or even quadrupling of demand for physical gold.
In this article, I want to explore why this fantasy is not playing at in the short-term.
Background
India’s per capita GDP is currently 1,498.87 USD; this is compared to 6,807,43 USD and 14,611,70 USD for China and Russia respectively. Unlike the other two BRIC nations, however, India has high population growth and its GDP is growing at a lightning-fast 5% annually.
India is one of the oldest civilizations in the world, and gold has played as an important role in the cultural practices of the subcontinent.
The Indian Wedding Season and the holiday of Diwali are critical points in the Indian physical gold market. Demand is usually decided by the number of weddings occurring in the fourth quarter and the agricultural yield of the year; the later of which is determined by the quality of the monsoon rains.
India has had the best July in decades regarding monsoon rainfall. August and September were also strong.
A third of Indian gold demand, translating to one sixth of worldwide demand, comes from relatively poor rural farmers. According to Reuters, there is a correlation between gold buying and the strength of the Indian harvest, which in turn correlates to the strength of the monsoon.
The monsoon has been strong this year, and this suggests the physical gold market should be healthy. However, the Indian fantasy may not be the Indian reality
The Problem
The Indian gold industry is struggling despite headwinds from a strong monsoon and low prices. The problem is oversupply and weak demand; government policy has compounded the issue.
India does not produce much gold domestically, and its government does not allow exports of the metal. The introduction of new regulations seem to have also added to the glut in supply.
For most of the year, gold was cheaper in the isolated Indian market than the international spot price. At the time of the U.K’s ‘Brexit’ vote, the gap between Indian prices and global prices grew to as much as $100 per ounce.
Gitanjali Group (NSE: GITANJALI), chairman Mehul Choksi, states quote:
Gold prices are weak because of – disruptions like mandatory requirement of PAN card for transaction above 2 lakh Rupees.”
Presenting a Permanent Account Number (PAN) for tax reporting and tracking was made mandatory for all purchases over Rs 200,000 (currently equivalent to US$3,000) on New Year’s Day 2016.
This, arguably poor, government policy is also leading to black market activities. Quote:
Over the last 4 days alone, the authorities have seized almost 1 kilo of gold near the Bangladesh border, around 2 kilos inside a scooter in Siliguri, also in West Bengal, plus twelve 10-gram gold bars inside a bag at Mumbai Airport, and 1.3kg of gold inside the body cavities of a passenger landing at Hyderabad from Oman.
Also see: mint green bridesmaid dresses
Conclusion
I believe the long-term bullish case for gold in India is a fantasy as long as the Indian government over-regulates the market. Even regardless of regulation, the ‘Indian Fantasy’ theory seems suspicious.
The Indian gold market has had two major headwinds: lower than global prices + a strong monsoon and the results have been lackluster so far. Monsoon rains are not translating to significantly higher gold purchases as they may have done in the past.
It does not look like Indian gold demand will make up for dollar strength, the risk of interest rate hikes, and weak commodity market; factors that are currently pushing the price of gold downward.
Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: No position in gold ETFs, but long-term physical holdings.
