What Happens When You Tell Indians to Stop Buying Gold

India’s demand for gold during the second quarter of 2013 topped all other countries, according to the latest World Gold Council data. As noted by GoldCore, the demand for gold in India rose to its “highest in the last 10 years,” with jewelry, bars and coins demand, capping 310 tons during the period.

You can see India isn’t the only country in the East enamored with gold. I’ve discussed many times how China’s love for physical gold has endured, as gold deliveries on the Shanghai Gold Exchange climbed to record levels and jewelry stores were flooded with buyers in Beijing, Shanghai and Guangzhou.

Now the World Gold Council (WGC) confirms that in the second quarter, 60 percent of jewelry demand and almost half of all bar and coin demand came from these two countries alone!

This tells us that the Love Trade shines on. Like gold, the Love Trade doesn’t tarnish; it holds its luster.

In India, the Love Trade holds steady in spite of the government imposing import tax hikes on gold in an attempt to reduce the country’s current account deficit. In fact, according to the WGC, gold jewelry, bar and coin demand in India alone was 70 percent stronger in the second quarter of 2013 compared to the same quarter last year.

When the increased duties were implemented, I was skeptical that gold demand would be curtailed because of India’s affinity to the precious metal.

For decades, Indian families have celebrated weddings, births, festivals and holidays centered on gold and these traditions are passed down from generation to generation. Take the wedding industry, for example, where about half of the gold that Indians buy each year is for a wedding. With an estimated 10 million weddings taking place every year in India, the country sees a lot of gold buying out of love.

India’s culture is very different from that of many Western countries.

However, the record gold buying we are seeing today isn’t only out of love. I believe Indians are also buying out of fear due to its infamously poor and corrupt government policies.

I often say how government policies can be precursors to change. Good policies can drive economic growth and markets respond positively. Bad policies can have the opposite effect. At the same time Indians buy gold out of love for their family and close friends, they are also buying gold out of protection.

Take a look at the chart below, which shows gold’s return in Indian rupee compared with gold’s return in the U.S. dollar. In the U.S., where the dollar has strengthened, gold has increased only 12 percent on a cumulative basis over the past three years. But in a country with a significantly weakening currency, gold gained nearly 50 percent.

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With the government in India recently raising its import tax for gold to 10 percent, I firmly believe Indians will continue indulging in gold, even if they have to smuggle it in.

Gold Setting Up a New Bottom

Gold is setting up a new bottom where I peg at $1550 and its next test of a new high will be $2000 by June July or later this year. It depends on the outcome of the US fiscal mess and the budget cuts.

I also feel that the US and world stock markets are threatening to crash which obviously is highly deflationary.

However making a bet, I believe the markets will not be permitted to crash. Therefore gold has a likelihood of hitting $2000 this year, or at least testing this and over the $1800 former high.

I estimate this a 75% probability.

Obviously, if the markets crash hard, then all the resource stocks crash too for a time. Gold would crash most likely for a time too. As would silver (I talk about gold all the time but silver is included to me so keep that in mind).

I suspect that the US will come up with some ridiculous compromise and the US stocks will at least be stable or even rally. This is gold bullish.
The outcome of the US fiscal sequestration the way I say here is 55%.

If US sequestration fails, I mean the avoidance of it, the chances of a major US and world stock crash in the months between now and July are 70-80 pct.

Overall the world has decided to make the central banks the guarantors of all markets for some reason. Why I can’t say. But according to my tracking of public reports, the world central banks have put out an incredible $35 trillion backing up markets of all sorts since 2007/8. Much of this was currency swaps between the US Fed and the ECB to support the Euro.

Gold Going to $2500, $3500

Then $4500… and by that time I think the US bond market will explode.

The US passed the ‘fiscal cliff’ by making an agreement to raise taxes over 600 bn and cut spending $20 bn. Wow.

In two months the US has to raise the debt limit. The Limit is already reached but the Treasury is using side measures to cover the deficit till then. Supposedly they can make a new deal.

Given the fact that the US is the only major economy with any solvency left, even with their immediate national debt at $16 trillion, and a POTUS(president of the united states) who is determined to borrow as much as possible in is his remaining time (guy has no real knowledge of much of anything really) …that

The Gold price will ratchet up inexorably this year, I would be super surprised if it did not easily break $2000 a month or two after they automatically raise the debt limit for the US in two months. In fact I think the gold price will break and hold $2000 and then immediately test $2500 for a time, before being beat back to the new low baseline, $2000, and during 2013, it will fluctuate between $2000 and let’s be a bit more generous $3000. (Really my estimate is $2000 to $2500).

But my more generous estimate will be probable. The US fiscal situation is out of control. As I stated it’s the only major economy left with some credit.

Seriously. China. Laugh. They are fake, and have a banking system far worse than US.
Europe. Laugh. Need I say more?

Japan, laugh, they are on the verge of a bond crisis and using extraordinary measures now to fund their huge deficits, and have a trade collapse and are now even on the verge of saber rattling with China over those small insignificant islands.

And THEN, we talk the war potential in Asia over this and also the Mid-East. It’s an easy call to say that gold is headed really to more like double its present numbers. Over $3000.

It is tough to catch the currency fluctuation and predict the gold price in INR but probable range will be Rs.35000/10gms to Rs.45000/10gms on higher side Rs.65000/10gms.