After the Fed's gold crash, what might India's Chaturmas mean for prices...?
After the import curbs came the Fed. Next will come Chaturmas. Might this 'closed season' for Indian weddings finally stem the subcontinent's frantic gold buying this summer?
It usually does. All Asian gold demand tends to ease off mid-year, but India goes dead quiet, thanks to the lack of auspicious days on the Hindu calendar. 2013's Chaturmas - literal meaning, "four months" - starts in mid-July. Although it starts later and is shorter than in 2012, the shutdown for Indian weddings will still run until early November as the Hindu gods and goddesses enjoy their Yogi Sleep.
Lord Vishnu deserves a rest after the frantic gift-giving and wedding demand for gold seen so far this year. Chaturmas should also enforce a truce between Indian households - the world's No.1 gold consumers - and their government, now one of the world's most anti-gold administrations.
Hiking gold import duty to 8% last month, and imposing strict new rules on how gold imports can be financed (no credit, in short), the government has still met record levels of gold demand. To their mind, that has only worsened a problem hitting emerging markets everywhere: a sudden outflow of foreign cash, spooked by chatter about the US Federal Reserve daring to slow its rate of money creation. Or maybe even raising interest rates from zero. At some point. Perhaps.
The effect on what were the world's hottest investment hotspots has been dramatic. Mass protests in former darlings Turkey and Brazil come as Western fund managers hold their lowest allocations to developing economies since the Lehmans' crash of 2008. China looks to have all but stopped buying US Treasury bonds, thanks to slowing inflows of cash needing a home, plus the sudden need to keep money at hand as Chinese credit dries up. India's latest curbs on gold imports were supposed to buoy the Rupee (everyone said so), but it has sunk to new all-time lows on the currency markets regardless.
Well, not quite regardless. The world's biggest gold buyers, Indian citizens boast zero mine output. So pretty much every ounce bought for weddings, festivals and the 10% of household savings which go into gold each year must come from abroad. The government warned time and again it wanted to curb those gold imports, because they dent India's current account deficit so badly that they hurt the Rupee. So mid-April's gold crash was already preceded by a sharp upturn in buying. Because people who love buying gold love buying it now if they know supply will be capped tomorrow.
The Rupee's slump has only made gold more expensive. But wholesalers, if not final consumers, kept buying gold anyway. Even the end of credit-paid imports failed to dent May's surge in demand. So far, all the new 8% duty has done is spark warnings (and reports) of increased smuggling, with Dubai only a short trip away by dhow overnight. Still, the Hindu wedding season - for which tradition demands heavy gift-giving in gold - is set to end mid-July. Thanks to Chaturmas, it won't resume until after the festival calendar starts again in September. A bit like Lent for vegans, it bans the eating of certain leaves, fruit and tubers as the gods take their rest. And all else being equal, India's summer vacation from bullion also helps to cap gold prices worldwide.
On a monthly basis, over the last 45 years, the Dollar gold price rose 2.2% annualized between June and September on average. The annualized rise between September and May was 14.8%. Sure, Western fund managers following the "Sell in May" motto also helps flatten the action. But internal to gold's supply and demand balance, Chaturmas removes the No.1 consumers.
From the Gregorian calendar, however, Chaturmas is a moveable marriage ban. And all told in 2013, Hindu observance allows nearly 25% more wedding days than it did in 2012 according to this chart from Kotak Mahindra Bank's Shekhar Bhandari, speaking last year at the LBMA conference in Hong Kong. The summer lull in Asian demand is delayed, in short, and wedding gift-giving will start again sooner. And failing to curb demand so far in 2013, India's government hasn't even managed to beat a rise in supply, thanks both to people's continued love (and need) for hard asset savings (Indian households have seen gold rise vs. Rupees in 30 of the last 39 years), and more recently to spring 2013's global gold discounts.
All this is cold comfort, of course, to Western investors and savers watching gold prices plunge once more this week. Yes, Asian savers have hoovered up much of the gold sold from ETF trust funds, but the acceleration of gold's eastwards drift hasn't done enough to prevent a slump in prices. And it's that slump itself which really sparked the surge in Indian and Far Eastern demand. Still, thanks to these bargains, Asia is on track for record quarterly buying according to Marcus Grubb of the World Gold Council. Perhaps some 400 tonnes of gold will be sucked into India alone between April and June - "almost half of the total imports in the whole of 2012." And with Swiss refineries only now catching up with demand, that has led to record highs in the local premiums for 1-kilogram gold bars, over and above the international spot price for wholesale 400-ounce bars (12.5kg), in the Asian centers of Hong Kong, Singapore and Mumbai.
Again, it's important to note that - for now - this surge has come from price-wise consumers. First Indian dealers and households stocked up ahead of New Delhi's clearly flagged action against the drain on foreign currency holdings which imports require. Second, the price slump of mid-April (and now mid-June) has unleashed pent up demand which did not exist north of $1500 per ounce. Any bargain hunting this month might well prove to be consumption brought forward as well. Only once Chaturmas ends can we gauge the strength of India's peak demand for 2013, as Diwali draws near. Two months later, Chinese wholesalers will start getting ready for the Lunar New Year gold shopping spree. Between them, Indian and Chinese consumers now buy one gold ounce in every two sold worldwide. But the first faces 8% import duty, plus 4% sales tax, and smugglers will struggle to match the record levels of legal flows. China meantime faces a banking crisis all of its own. And no one can yet say how gold-loving households will act when the credit and economic growth of the last 20 years takes a pause, nevermind a dive.
Still, looking ahead, and with Western investors continuing to sell, "Gold [has been] passing from the clearly 'shaky' hands of [ETF trust fund] investors into 'strong' hands," reckons Commerzbank - "a trend that should lend support to the gold price in the medium to long term." And beyond there, don't miss where long-term economic power - and gold - is heading worldwide. If you fear a decline of the West, relative to fast-rising Asia, it makes sense to buy at least a little of their first choice for household savings. Not least at today's knock-down prices.