With the global economy grinding forward and inflation expectations beginning to dwindle, gold has had a rough year. As investor interest has fallen, so has prices for the precious metal. So far, gold and its respective exchange traded funds- like the popular SPDR Gold Shares (NYSE:GLD) –are down about 22% year to date.

That’s put the yellow metal very much in the bear market category. However, that bear may be growling a little bit louder as the second half of the year continues.

Major importer, India has set forth a new basket of rules designed to slowdown gold buying in the nation. Given its status as one of key pieces of demand for physical gold, gold bugs could be in for a world more hurt in the short run.

Aggressive Tariffs

For India, gold seems to be a way of life and is featured prominently in several festivals and cultural events. According to the World Gold Council, India is the world’s biggest importer of the metal and purchased 863 tons of gold last year. However, all of that gold buying has significantly hurt the nation’s account deficit. In the face of India’s poor economy, that’s a major issue.

In order to combat this issues, the Indian government has set fourth an aggressive stream of tariffs designed to reduce the nation’s gold buying frenzy.

First, the Reserve Bank of India (RBI) has hiked tariffs and taxes three times since January to a record 10%. Then in July, the RBI told gold importers that 20% of their imports would need to go back on the international markets as exports. That move basically caused almost all gold imports into India to cease. India imported only 47.5 tons in July- worth $2.9 billion. That about slipped to only $0.65 billion in August.

Yet, the central bank was not done.

This past Tuesday, in order to reduce demand even further, the government raised the tax on gold jewelry imports to 15%. Analysts estimate that this move could reduce India’s total gold imports below 750 tons by March of 2014. That’s roughly about 11% lower than a year ago.

Given expectations for dwindling QE programs in the developed world, these lowered imports are quite a concern for gold prices. Physical demand in India was seen as a price-floor for gold and without it, several analysts now expect lower gold prices on the horizon. Citigroup (NYSE:C) expects that gold will average just $1250 an ounce, while analysts at Goldman Sachs (NYSE:GS) predict that gold will drop below $1000 on the reduced buying.

Playing The Downtrend

Given that India is such a major force when it comes gold prices, any dip in its buying activity will certainly hinder the precious metals chances over the short to medium run. Given this fact, investors may actually want to short the precious metal, before perhaps buying in at lower prices. Many gold funds- like iShares Gold Trust (NYSE: IAU) –are quite liquid and can be shorted with much ease. However, there are easier ways to short the metal.

The biggest of which is the ProShares Ultra Short Gold (NYSE: GLL). The ETF is designed to deliver twice the daily inverse return of gold bullion prices. With more than $100 million in assets and with nearly a 330,000 shares trading hands daily, the fund is the most popular choice of investors looking to short gold. So far it’s up about 29% this year as gold has fallen.

It stands to reason that lower gold prices will hurt those firms that mine metal. Already, shorting the gold miners has been amazing successful as share prices for firms like IAMGOLD (NYSE:IAG) and Barrick Gold (NYSE: ABX) have cratered. The Direxion Daily Gold Miners Bear 3X Shares (NYSE:DUST) provides a leveraged way to short the popular Market Vectors Gold Miners ETF (NYSE:GDX).

Finally, the real purpose of India’s tariffs is actually to boost its sagging economy and account deficit. Funds like the iShares MSCI India (NASDAQ: INDA) and PowerShares India (NYSE:PIN) could add extra “oomph” to a gold short as the RBI’s plans take action.

The Bottom Line

With tapering talk and better economic conditions facing the global economy, investor sentiment for gold is fading. That luster is about to get even more dim as world’s largest gold importer- India- is set to increase tariffs even further. That fact could cause gold prices to plummet. For investors, the best bet may actually be to short gold.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not ...
  2. Equity

    The value of an asset less the value of all liabilities on that ...
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!