After 12 long years of being the darling commodity, gold is finally showing signs of mortality, as the precious metal has lost more than 20% in 2013. Though many felt the bull run, which included a dozen consecutive winning years, would continue with the Fed’s easing policy, the metal has finally succumb to the pressures around it. While many continue to try and pinpoint the reason behind gold’s steep drop, commodity legend Jim Rogers points the blame to a popular emerging market [for more gold news and analysis subscribe to our free newsletter].
India and the Gold Effect
As Rogers notes, India is the largest buyer of gold in the world, giving them a fair amount of influence over the price of the metal. As gold continued to skyrocket in price, so too did India’s trade deficit, the largest drivers of which are gold and oil. As Rogers states, the nation can’t do much about oil prices, so that leaves gold to take the fall.
As such, India has taken a number of measures to slow the import of gold including a ban on installment credit card purchases. The first half of May saw India purchase $135 million in the first two weeks of the month, but only $36 million the latter two weeks of the month. Many economists have pointed out that if India would simply curtail its gold purchases, it would be able to alleviate its account deficit and get its economy back on the right track [see also 50 Ways To Invest In Gold].
India, however, is not the only country taking measures against the yellow metal. Germany and France have notably adopted policies aimed at slowing the purchase and selling of gold, putting this commodity in quite the pinch.
Gold and the Economy
While India has certainly been keeping gold down as Rogers states, the U.S. economy has also put a lot of pressure on the metal. With equities surging and markets enjoying a nice bull run, many investors have increased their risk appetite which has left safe havens like gold in the dust [see also Jim Rogers: Gold Will Resume Its Bull Market].
This shifting of assets has been best demonstrated by the SPDR Gold Trust (GLD) which has seen outflows of over $19 billion this year alone. For a brief period of time in 2011, when gold hit its historical peak, GLD was the largest ETF on the face of the earth. Now that gold is on its way back down, the fund has fallen to 5th place by assets, and could easily lose a few more spots before the year closes out.
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Disclosure: No positions at time of writing.
India had its main gold buying religious holiday on May 13th, which explains why there was a lot of buying of gold in the first half of May, but not the second half. This happens every year. Buying gold is part of the Hindu religion. To think that the Indian government can overcome thousands of years of religious beliefs is naïve to say the least. There is a saying there, “no gold, no wedding”. I’m sure people will listen to the government and stop getting married (not on the planet earth of course, but in some alternate universe). Indians are also desperate to get gold because they see the value of the Rupee declining and they want to get rid of their paper money. If it can’t be done through official channels, it will be done through black markets.
And by the way, it looks like China will overtake India this year to become the world’s biggest gold consumer.
To sum it up: Gold is down due to heavy governmental pressures. So what we see isn’t the ‘real’ price of gold, it’s the ‘suppressed’ price of gold. The real price is yet to arrive. Whoa! interesting happenings lined up in the gold market…
[...] a 12-year unstoppable bull run, gold finally met its match in 2013. Investors had been hopping on the bandwagon with great success for a number of years, as [...]