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Good monsoons, strengthening rupee, festive season demand, ETF demand are factors that would bring gold higher up. Weak monsoon, weak rupee, financial inclusion by virtue of Aadhar project, investments by upwardl..

12 Oct 2012

By Rakesh Neelakandan
Gold! Everybody wants it these days...

Once dubbed the most-useless-asset, gold is now the darling, doyen and apple-of-eye of investment community. You will die for a piece to own it and you would rather die trying than not getting it.

No wonder, gold demand is surging through out the world. From central bankers in the mainstream to poor farmers far away from the ambience of growth have been vying to get hold of it. And yes, notwithstanding the everyday fluctuations gold prices are going up, dwarfing the Everest.( The commodity has appreciated by 200% in the period spanning 2005-2010; just an indicative trend)

So it would be interesting to know what drives gold prices northwards these days in India and what can bring it down.

--Good monsoons, strengthening rupee, festive season demand, ETF demand: factors that would bring gold higher up
--Weak monsoon, weak rupee, financial inclusion by virtue of Aadhar project, investments by upwardly mobile in other precious commodities: factors that can bring gold down.

Monsoon factor

A strong monsoon is always bullish for India gold. But the monsoon that has just past, the South west monsoon, is deemed a failure as far as the farmer community is concerned. They have been unable to reap the benefits of monsoons beyond a point; some of the crops like paddy have seen a growth in sowing area in excess of the normal area; others like coarse cereals and pulses have fallen behind in acreage. This is expected to result in a drop in farmer incomes.

The farmers who generally seek credit before the sowing season commences in June-July expect to pay back the same when the harvesting season concludes with the money they amass. So a failed or unsatisfactory monsoon heralds a crunch time and farmers scramble for money to pay back to money lenders. Since they lack banking access, the farmers generally store their valuables in gold.

When the fields and incomes turn out to be dry, cash parched farmers tend to liquidate their gold. Since monsoon is a national phenomenon, failure of monsoons would mean failure of Indian farmers. In order to save their dignity and protect their children and women folk from the goons of local money-lenders, the poor farmers would take gold to this very money lender who lent them a sum in the first place.

This could possibly mean more and more of gold reaching the markets as well as gold demand plummeting as farmers refrain from buying gold and resort to selling. No wonder, failure of monsoons not only kill the demand of yellow metal but also add to some market surplus in gold. The latter case is however is an assumption and not backed by any studies or data.

Now, with their gold assets emptied, farmers would again have to seek money from the lenders on credit as they have nil alternatives on the onset of north east monsoons.

Meanwhile, once the dry northeast monsoon begins in September, most precipitation in India falls on Tamil Nadu, leaving other states comparatively dry. [The state's normal annual rainfall is about 945 mm (37.2 in), of which 48% is delivered by the northeast monsoon and 32% by the southwest monsoon.--according to a wikipedia article.]

This means that farmers other than those of Tamil Nadu may find it difficult to raise money as lenders may be unwilling to lend them money. They may ultimately have to leave their fields fallow and may have to join the umpteen migrants heading for the cities in search for some menial jobs.

This means that demand for gold may further plummet post the north east monsoon time ie December.

However, the Aadhar project floated by the government at the centre is an initiative that can bring farmers into the mainstream of financial inclusion. The project has the potential to give the crucial item that farmers may need to open a bank account: a trustworthy identity card. This can push the farmers further to save money in terms of currency rather than gold. The factor thus is bearish for gold.

Rupee factor

Indian rupee has been volatile for many a weeks now. With dollar too fluctuating wildly, responding to various crises and data releases and moving back and forth, it is no wonder that rupee too fluctuated. The fickle nature of FIIs too contributed to the volatile trend.

It is text book knowledge that when rupee strengthens, or dollar weakens there are two possibilities

1. Gold prices can go up because gold is a dollar denominated commodity and it take less of rupee to buy more of gold
2. Gold prices can come down because strengthening of rupee can aid import of gold thereby bringing its prices down

But in India, gold import tax has been hiked by 2% and currently rules at 4%. This has significantly dampened gold imports since the last budget.

This leaves the choice open for the first case.

With India government announcing reform measures in a big way, and also putting its foot down on it, the rupee and equity markets have strengthened. The factor would ultimately aid gold prices.

With the US government continuing with its money printing program, or QE3, dollar is expected to remain weak over the longer term. Besides the eurozone crisis and the monetary easing measures by other nations too would aid the uptrend in gold prices.

Festive season demand

Festive season is generally the time when gold prices go up as demand goes up considerably. Last year, even as the jewellers expected festive season demand in gold to pick up during the Akshaya Thrithiya, it did not happen. This time around, things are much worse than last year and with a gloomy economic outlook, it is doubtful if gold demand would pick up in Deepavali.

The festivity time is a time of cheer. Gloominess can dampen the outlook and may lead to cutbacks in jewelery demand.

ETF demand

India demand for gold ETFs have hit an all-time high and according to Business standard has seen investment flow in yellow metal pushing the size of assets held through gold exchange traded funds to an all-time high of Rs 11,198 crore.

“According to data compiled by mutual fund industry body AMFI, the assets under management of gold ETFs crossed the Rs 11,000 crore mark in September from Rs 10,701 crore in August” the report continued to say.

The factor is thus bullish for gold.

Investments in precious metals other than gold by upwardly mobile is yet another factor that can affect gold prices in a negative way.

Diversification of precious metal assets is a sound investment advise and the upper middle class is really keen to follow the advise. (rakesh@commodityonline.com)

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