Thanks, Cyprus, for Low Gold Prices – and Indian Buying Bonanza

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Continued from Part One.

According to a report in the Wall Street Journal, designated banks and trading houses were paying $7-$8 an ounce more to get gold from international suppliers – about five times the premium that retailers normally paid for imported gold during peak season.

Happy customers notwithstanding, the sharp decline in gold prices is expected to give an “unexpected” surge to the Indian economy.

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According to the Indian prime minister’s Economic Advisory Council (PMEAC) chairman, C. Rangarajan, the lower prices of gold combined with the falling prices of crude oil will have favorable impact on the economy, especially the high current account deficit and the overall Balance of Payment (BoP) position. Gold and crude account for about 45 percent of the country’s total imports.

But not everyone is happy with the slide in prices.

Gold loan companies like Muthoot Finance, one of the leaders in this business, may bear the brunt of the lower prices.

These companies give loans against mortgaged gold. When retail standard gold prices were at a high of approximately US $553 per 10 grams, these companies had taken them in as collateral of a certain value, but with prices dropping, naturally, the collateral gold value, too, has come down.

There is little that these kinds of companies can do for the time being, except pretty much just pray that prices go back to previous levels.

Muthoot officials have clarified that they had factored in a fluctuation of about 20 percent in gold prices in their business model. Also, they were only financing household jewelry, so apparently, the impact on their business is not that huge. But if prices fall below that threshold, as they are expected to, what happens to the business models of such companies is anybody’s guess.

For the rest of the world, Indians buying gold could eventually turn out be a good thing. Past history shows that stepped-up demand from India eventually pulls up global gold prices. So if the current gold-buying spree in India continues, it could support higher gold price levels.

Sohrab Darabshaw contributes an Indian perspective to MetalMiner.

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