India's Gold ETF Assets May Soar 17 Times on Refuge Demand, Executive Says

Gold held by exchange-traded funds in India, the world’s biggest buyer of bullion, may surge as much as 17 times in the next three years as investors seek a refuge from financial turmoil and inflation.

Assets may reach “100 tons to 200 metric tons” from 12 tons now, said Rajan Mehta, executive director of Benchmark Asset Management Co., which runs the nation’s first and biggest goldexchange-traded fund. “The growth will definitely be faster than what we have seen in the past.”

Investors globally bought 291.3 tons of gold in ETFs in the second quarter, the second-highest amount on record, as prices climbed to an all-time high of $1,265.30 an ounce during the sovereign-debt crisis in Europe, the producer-funded World Gold Council said on Aug. 25. London-based researcher GFMS Ltd. and Goldman Sachs Group Inc. expect gold to advance to $1,300 this year as the metal heads for a 10th straight annual gain.

India’s seven bullion-backed funds had 19.7 billion rupees ($420 million) in assets on July 30, more than double the amount a year earlier, according to the Association of Mutual Funds in India. Increased inflows may help support prices.

Investment demand for the yellow metal in India more than tripled to 92.5 tons in the six months ended June 30 from 25.4 tons, the council said.

“These are significant numbers and these are beginnings of trends that one will see and hopefully these trends will be long trends, mega trends,” Rujan Panjwani, president at Edelweiss Capital Ltd., said Aug. 27.

Popular

Exchange-traded funds have become popular worldwide since their creation in 1993 as they widened investors’ access to different type of assets. Gold ETFs allow investors to trade bullion without taking physical delivery of it.

Holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, expanded to a record 1,320.44 tons in June, and were at 1,298.56 tons as of Aug. 27, according to the company’s website.

“Today the industry has only 12 tons, which is very small compared with volumes all over India,” Benchmark’s Mehta said in an interview in Goa. “There is a lot of room to grow.”

Benchmark’s Gold Bees had 9.85 billion rupees in assets on July 30 and has returned 19.6 percent annually since its launch in March 2007, according to its website.

Indian gold funds have gained an average 19 percent in the past 12 months, compared with a 25 percent jump in local prices, Bloomberg data show.

Futures in India reached an all-time high of 19,198 rupees ($410) per 10 grams on June 8. The metal for October delivery advanced as much as 0.2 percent to 18,928 rupees on the Multi Commodity Exchange of India in Mumbai.

“Gold has delivered good returns, so normally many advisers feel safer in advising gold as part of asset allocation,” said Mehta. “Gold as an investment theme is gaining ground.”

Gold and Deflation

I have been speaking and writing about gold’s appeal in a deflationary environment – this is a concept that opposes the conventional opinion that the gold price will not rise without inflation.

Those who cling to that singular gold-inflation relationship have not examined the history of gold as money. Whenever there is substantial inflation or deflation, governments tend to either be too slow to react or they overreact with policies, and this is typically good for gold.

Interest earned on 90-day Treasury bills below the inflation rate is a signal for governments to try to stop deflation and reflate the economy. When this happens, gold becomes attractive. We are in such an environment now.

During these periods, governments usually need to increase their deficits by escalating their borrowings to support the economy. This also supports gold as safe money in addition to its beauty as jewelry.

The twin engines of negative real interest rates and government deficits tend to make gold a very attractive investment. Recent research supports our historical findings on what drives gold.

This chart from Deutsche Bank shows that for the past four decades gold (and silver) have performed well in a country’s currency when that country has low or negative real interest rates.

The Federal Reserve’s main interest rate is near zero and inflation is a little over 1 percent, so we now find ourselves in a negative real interest rate situation. The Fed has made it clear that it has no plans to tighten money by raising that key rate any time soon because of the sluggish economy and soft housing market (mortgages are now at a 21-year low), so this condition is likely to endure.

“The decline in core inflation from 2.5 percent two years ago to under 1 percent today will sustain market fears of deflation and hence a more rapid depreciation of the U.S. dollar to arrest any deflationary pressures,” Deutsche Bank’s analysts wrote. “We believe that the road map to resolve deflation is therefore bearish for the U.S. dollar and another factor which will propel gold prices to new highs.”

The Fed this week plotted part of that road map – it said it will pump more money into the system to try to kick up economic activity. As the 2010 midterm election draws closer, there is also a growing call for another round of stimulus spending to try to pull down the 9.5 percent unemployment rate.

Such a move would widen the federal budget deficit, which is already estimated at nearly $1.5 trillion for this year and will roughly be the same in 2011. The U.S. dollar is not only our currency, it is also the world’s reserve currency. Deficit spending puts downward pressure on the dollar, and when the dollar falls, investors tend to turn to gold.

When you add the interest rate and deficit scenarios to the gold seasonality trend – September is historically the best month of the year for both bullion and gold equities – the conditions now appear promising for gold.

Gold Readies For A Major Price Thrust To $1,325-$1,375 This Fall

This is the time for real action by real men. Instead we have a bunch of stupid, wimpy, inexperienced, academic children playing with matches and gasoline. There is zero leadership, so get ready to run.

Technically, weekly gold is supported at $1,207 and capped at $1,265, (chart below) the former recent high price. However, by using more elaborate and technical charts (not shown) we find the new gold support on December, 2010, gold futures to be $1,175. Seasonally, gold should sell mildly once more to that projected number and then rebound in a new fall rally taking prices much higher.

Other more dominant market forces in bond credit and international stock markets could create unmeasured mayhem depending upon the ability of central bankers to keep things under control. These people are riding a bucking bronco and we think they are about to get tossed-off this horse. If in fact this occurs, our $1,325-$1,375 gold forecast could just be a door-opening beginning.

There is really no way to measure Black Swans, particularly when a whole flock is now flying in large formation. It only takes one slip like the Long Term Capital (LTC) multi-billions mistake back in the 1990’s. That mess scared the wits out of a lot of people as the Big Black Nasty Bird was an unexpected failure in Russian Bonds. This time the stakes are much higher on several fronts. No one can tell me Chopper Ben and Timmy “The Kid” Geithner really have a grip on this mess.

This markets’ dilemma is an impossible dream. The manipulators still have tools and they will do anything legal or illegal (Witness Former Treasury Secretary, Hank Paulson’s TARP Robbery) to keep it all glued together with bubble gum and bailing wire.

As we have said so many times, when the bond markets renounce Chopper Ben’s bond Games, it’s all over. In our view, we are very near to that date but of course cannot pin-point it exactly and neither can anyone else. As they say, this is when the rubber meets the road. This is the time for real action by real men. Instead we have a bunch of stupid, wimpy, inexperienced academic children playing with matches and gasoline. There is zero leadership, so get ready to run.

Be very careful in any stock or bond market. We like physical gold and silver, select senior and junior precious metal shares, very specific property locations (by nation) and top flight management. Further, they better not be under any severe pressure to raise more operating capital in this weird credit environment.

For trading, we are recommending gold and silver spreads, grain, and certain other futures and options spreads. For the primary stock market there are several select choices among more than one country for going short and staying short. Remember, it can take weeks or months climbing up the hill on the long side. But, coming down on the short side it’s many times faster and much more exciting.

To put it bluntly, we think bonds of all kinds just stink. Can they be traded, you bet. However, you better be a very fast screen watcher with your hand on the mouse to avoid getting ripped. We think this kind of trading is for the pros and there are easier ways to earn money without a heart attack.

Watch out for faster markets, more volatility and surprises in all directions. One example: We think the Euro is a goner but China is shedding US Dollars for Euros. Obviously, they think the Euro is safer than the dollar for now. We think the opposite is true but the Chinese own way too much US currency, bonds and bills.

Both gold and precious metals shares (XAU) are squeezed in triangles. Before price hits the triangles’ apex, we suggest they both break-out through top channel line resistance and take-off in new fall rallies from the end of this month to nearly Thanksgiving. After that holiday, expect even more buying after a normal, technical, profit-taking pullback.

Note the end of summer gold rallies just before the “O’s” for October many years in a row.

What ever happens to foreign economies, credit and banking along with the American vote in November… could be a major turning point in world affairs affecting all citizens world-wide. This is a generational changing series of events. It might be prolonged but we think not. Prepare for several smashes and crashes from later in this month of August through nasty springs and falls all the way to 2012 when I predict World War III begins over energy, economics and settlement of several old grudges; some of them being 5,000 years old.

The US Dollar and American standard of living shall be cut in half over the next few years.

Now, more than ever, it is important to take the immediate necessary precautions to protect yourself and your families and friends. Traders and investors should be buying precious metals and select shares right now. In our newsletter we have a great list of trading and investing ideas for you. Meanwhile, you can never go wrong buying physical precious metals and holding them for security. We’ve had a constant run of nearly ten years in gold rising 15% per year so this remains a good trade. In the last twelve months, gold rallied over 34% and is going ever faster.

It’s not going to stop any time soon. In fact, we predict those annual percentages will rise even more and this offers a chance, arriving only once in 25 years on the historical cycles. Good trading! -Traderrog