Markets have been surprised by how little geopolitical events have moved the gold price in recent months. The gold price has risen some 8% this year closing last week at around $1300/ounce as uncertainty over events in Ukraine and the military coup in Thailand have raised risk perceptions among investors. However, the recent elections in India have introduced another variable.
Last July, India’s central bank introduced what was termed the 80:20 rule, whereby a restricted number of importers could import physical gold with an increased 10% duty provided they re-exported up to 20% as finished jewelery. Understandably, this reduced imports in the world’s second largest consumer and put downward pressure on prices.
Imports of gold for conventional financial investments such as gold coins, bars, etc. slumped 45% in the first quarter to 45 tons accompanied by a fall in gold for jewelery which followed on lower imports in 2013 over the 2012 import numbers. Rumor has been rife, though, that incoming prime minister Narendra Modi’s BJP party may act early to revoke some of these restrictions. The expectation has been that by the Hindu Diwali festival in October, part or all of the 80:20 rules will have been relaxed.
In what may be a sign of the dynamism that Mr Modi intends to bring to Indian politics, even though the gold price slumped 3% this week – the biggest fall in a day this year in India – the Reserve Bank of India (RBI) acted almost immediately to ease import restrictions on the precious metal. According to the Indian Business Times, traders attributed the sharp fall in gold prices to a heavy sell-off by speculators who had been stockpiling metal in anticipation of price rises in the country.
In spite of price movements within India, the probability that Indian importers would be back in the market would normally have given a boost to prices but, in fact, prices have fallen sharply today as this graph shows. Reports that Russia’s central bank has quietly been stockpiling bullion, according to a report in the UK Telegraph quoting sources at Commerzbank, the Russian central bank has added 28 tons of gold to its vaults in a bid to shore up investor confidence in the economy and currency as the Kremlin locks horns with the west over Ukraine.
This news has done little to move the market and underlines that in spite of solid physical demand for gold at current levels, investors still have a limited appetite for it as an investment vehicle. With decent fundamentals failing to support the metal, you have to wonder how much further gold has to fall before investors begin to look favorably on it again. A long way may be the answer.