I don’t get it…
What’s so special about gold?
In my view, it’s just another commodity to trade on the market. If you want to buy some physical metal, you might as well use it as a doorstop. That will change in the future, if gold becomes an underground currency as I expect. But that’s a story for another day.
Until then, like other commodities, there’s a time to buy and a time to sell. There’s never a time to be hopeful!
The major trend (which I analysed last week) is the best indicator. It removes a lot of the emotional bias, and should keep you on the right side of the trade. In gold’s case, despite the volatility offering the potential of short term gains, there has never been a great time to buy over the past five years.
Despite the downtrend in motion, though, gold may bounce soon. After all, nothing goes up or down in a straight line. If we see a bounce towards the US$1,205 level, expect the promoters to shout that ‘the gold correction is over’.
Don’t believe them!
I’ll run you through the reasons why…
India’s ‘war on cash’ knocked out gold
India’s ‘war on cash’ is one of the primary reasons we’ve seen gold move sharply lower.
As I discussed last week, the global war on cash is largely flying beneath the radar; yet it is rapidly transforming the world. India proved that physical money is becoming an endangered species last week.
As you’ve likely heard, the country is withdrawing a lot of cash: all its 500 rupee (US$7.40) and 1,000 rupee bills, to be precise. These notes represent 20% of the cash value in circulation and 80% of cash outstanding. India’s Prime Minister Narendra Modi made the shock move under the cover of cracking down on corruption, unaccounted money and counterfeit currency.
Make no mistake: this is a lie spun to steal a little bit more financial freedom. Governments are dead broke and want more money to pay for their mistakes. Eliminating cash so that they can track and control every dollar we earn and spend, is the easiest way for them to steal our breadcrumbs.
Indians have another 30-odd days to hand in the roughly US$23.2 billion of high-denomination notes to banks and post offices. The currency crush is producing long lines, public anger, and a risk of major civil unrest.
Where does the heavy gold selling come into it?
Marketwatch.com explained on November 15 (my emphasis added):
‘Estimates have been that the underground economy in India is about 20% to 25% of the total economy; the point is that it is very large.
‘The most common method to convert black money into white money over the past 50 years has been to slowly buy gold by paying cash using large bills. Converting black money into white money has been a major source of demand for physical gold. Now that large bills used to buy gold are worthless, demand for physical gold will decline.’
And that’s not all.
The biggest bombshell in over 45 years could hit gold any day now — a potential ban on gold imports into India. That would remove a massive source of gold demand from the market. Remember, India’s the second largest gold consumer worldwide. Among other things, it’s customary to gift jewellery in marriages.
News.trust.org reported on 25 November:
‘Mumbai resident Shashikant Zhalte’s wedding this weekend will be less sparkling than his family had hoped, thanks to a cash shortage following Indian Prime Minister Narendra Modi’s shock withdrawal of high-value notes to fight “black money”.
‘Zhalte bought gold jewellery for his wife-to-be months ago, but had delayed purchases for his mother and sisters.
‘The wedding season stretches from September to April, and Thomson Reuters-owned metals consultancy GFMS says it accounts for more than half of the country’s annual demand for gold.
‘More than two-thirds of that demand of around 800 tonnes a year comes from the countryside, where farmers are struggling to get enough cash to buy seeds and fertilisers in the sowing season. Penetration of credit or debit cards and money apps is very low in rural India.’
With the majority fearing for the worse, Indian gold premiums have surged to a two-year high, and jewellers have ramped up purchases. With the risk of gold becoming scarce, Indian prices have surged. It’s complicated; but the Indian gold price reacts differently to the gold spot price. I won’t get into the details today.
No cause for alarm…yet
Fortunately, the Indian price panic may start to subside. The Times of India reported on Friday night:
‘“There is no such proposal before the government on restricting domestic gold holding,” the source said.’
That’s a cleverly worded statement. There was no official denial of a gold import ban. That could still be on the cards.
India’s government has trialled several initiatives to reduce gold purchases. It has argued that citizen gold hoards are ‘unproductive’, and a sign of the country’s backwardness. The government believes the gold culture needs to be eliminated for the country’s modernisation.
The government has also aggressively raised tariffs on gold imports. And, as you may recall, more recently it orchestrated a scheme for citizens to swap their ‘physical gold’ for ‘paper gold’ products at commercial banks. This scheme, by the way, was a total failure.
So, will the Indian government totally ban gold imports?
It’s a real possibility…
If it happens, gold could plummet by more than US$200 per ounce into the New Year. For now, however, the official statement over the weekend may be enough for gold to bounce to US$1,205 per ounce.
I’d be looking at shorting gold at that level.