Why India’s Seasonal Gold Buying May Already Be Over

Matthew Carr By Matthew Carr, Emerging Trends Strategist, The Oxford Club

Metals

We value gold because it’s pretty.

Sure, it has some cool uses in technology. But that’s not why we value it as much as we do.

Thanks to gold’s use in jewelry, a lot of gold investors turn to India this time of year. Right now is the traditional wedding season in the Asian powerhouse, as well as when the Diwali and Dussehra festivals occur.

Each of these events relies heavily on gold purchases. And most investors believe they trigger a spike in the price of gold.

But the reality is that over the last couple of years, gold has tended to drop toward the end of the year…

In January 2015, gold was more than $1,300 per ounce. By December, it was less than $1,100.

In 2016, gold prices peaked in July at more than $1,380. By December, they were back in the $1,100 range.

In August of this year, gold surged to more than $1,300 once again… but prices have stalled since then.

That’s despite entering what some investors thought was an extremely bullish time in India.

I’ve come across accusations of “market manipulation,” as the price of gold hasn’t skyrocketed.

So what’s really going on with gold?

No One Likes the Tax Man

In recent weeks, a lot of gold bugs swooned as headlines touted India’s massive uptick in gold jewelry purchases.

In September, India, the world’s second-largest gold buyer, saw gold imports increase 31% year over year.

Obviously, that took place as we closed in on another round of festivals dependent on gold buying.

But the price of gold has slipped…

This has some investors scratching their heads. Others are decrying the game as fixed.

But here’s the deal…

Much of the gold purchases were made for the Dussehra festival.

This year, Dussehra was two weeks earlier than normal – at the end of September instead of in October. So some of the gold demand that we saw in October last year came earlier this year, in late September.

Plus, India’s gold jewelry imports in September totaled 48 metric tons. That may sound like a lot… but it’s not.

In fact, it’s actually 36% lower than the 75 metric tons of gold that India has imported on average every month in 2017.

Remember, India’s gold jewelry demand – especially in the second quarter – essentially drove global jewelry growth this year.

Through the first six months of 2017, global gold jewelry demand increased 8%… and India’s demand was up 41% during that period.

To put it into perspective, of the 34-metric-ton increase the world saw in jewelry demand during the first half of the year, India represented 36.9 metric tons of that, or more than 100% of the increase. That’s because demand fell in Europe and China, the world’s largest gold market.

In May, gold jewelry demand in India hit a record 104.6 metric tons.

From the outside looking in, you might be asking yourself, “How does that not paint a rosy picture for gold?”

But let’s keep in mind the realities.

India’s gold demand was off the charts in the first half of the year because the country instituted a 3% goods and services tax in July.

It’s not just an American phenomenon, it’s universal… Everyone in the world hates paying taxes.

Particularly if it’s a new tax.

And especially if it’s a new tax on something your religion demands you purchase every year.

This is why Indian gold buyers plowed into the market in May and June, before the tax went into effect.

In addition to the new tax, gold buying in India has been under pressure because of the Prevention of Money Laundering Act (PMLA) that was implemented at the beginning of August.

Indian jewelers and consumers thought this meant that they had to keep personal identification records and tax codes for customers who purchased more than 50,000 rupees ($765.58) in gold.

Just recently, the government issued a statement excluding the jewelry industry from the PMLA. And that revived demand… just in time for Diwali…

India’s October gold imports are projected to be 70 metric tons.

But that’s still below the monthly average set this year.

In 2016, the gold jewelry market saw demand fall to a seven-year low. India’s own demand fell 22% and saw the biggest yearly decline on record.

And this year, the buying spree took place in the first half of the year. Global demand isn’t up double digits after one of the weakest years in nearly a decade.

Keep this in mind when you follow global demand for gold – or any commodity, for that matter. There are often more factors than first meet the eye…

Not even traditional events that have existed since before recorded history have as predictable of an economic effect as you would think.

Good investing,

Matthew