Did India Just Hurt Gold’s Chances Even Further?

By Aaron Levitt | September 23, 2013 AAA

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.

 

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