Gold mavens study Hindu culture along with QE3

India is the largest consumer of the precious metal, so investors should understand what drives demand there.

By Apr 29, 2013 3:12PM
Gold Bars copyright Stockbyte, SuperStockConfused about where the price of gold is going next? You are not alone. The mysterious metal clawed back a 7% gain last week after cratering 15% the week before, as measured by the popular SPDR Gold Shares ETF (GLD). 

Retail buyers across the globe rushed in to stem a panic by options traders and ETF investors. The U.S. Mint reported that April gold sales were tripling the level of March. Demand from India exceeded its previous record by 20%, according to supplier Standard Bank (SBGOF). Pretty much every place in between caught gold fever, too. That did not impress the ETF crowd, however. The Gold Shares fund continued to lose clients and hit its lowest investment level since 2009.

The experts differ about what will happen next. Bloomberg's weekly survey of gold market analysts, published April 25, was split nearly down the middle: 15 mavens predicted rising prices, 11 expected another drop, and four abstained. Goldman Sachs, whose April 10 recommendation to short gold helped catalyze the market implosion, came back with a muddled call last week. It advised clients to close out their shorts, while noting that it still expected bullion prices to fall. 

In Wall Street-speak, that sounded like this: "Our bias is to expect further declines in gold prices on the combination of continued ETF outflows as conviction in holding gold continues to wane as well as our economists' forecast for a re-acceleration in U.S. growth later this year."

What is clear is that the intellectual scope of gold analysis needs to broaden after the past two action-packed weeks, when emotional throngs whose idea of financial planning is gold slabs in a family vault rescued a market that the minions of MBA-land had given up on.

Financial pros are used to crystal-balling gold prices based on abstruse projections of Fed and European Central Bank monetary easing, sub-tectonic inflationary rumbling, and the like. And gold is used to frequently confounding them. Last Friday, for instance, the lead world market news was disappointing US first-quarter GDP growth of 2.5%. That would seem like a sure positive for gold as an "alternative store of value" to equities and the dollar. But alas the contrary metal fell, too.

Smarter analysts will understand they now need to get up to speed on totally unrelated disciplines, like the Communist work calendar and Hindu customs and holidays. The most important development for gold this coming week might be an interest rates call by the ECB or a conclave of the Fed’s Open Markets Committee, which are both on the calendar. But those might be eclipsed by the fact that China has a three-day holiday to celebrate May Day, and potential gold buyers there will be at the beach instead of lining up at their local jeweler. 

But the 800-pound gorilla of the physical gold market is India, which devours as much metal as China and the US combined.  It happens that the global sell-off by speculators was ideally timed to be offset by Indian retail buying. April is the height of the spring wedding season, and Indian brides signal their social status by bedecking themselves in gold jewelry and ornaments.

Weddings taper off through May and go dead in June, when the monsoon rains come to South Asia. Gold buying should continue apace at least until May 13, though, which this year marks the Hindu festival of Akshaya Tritiya.

For the anthropologically minded, this holiday commemorates the birth of Lord Parasaruma, the sixth incarnation of Lord Vishnu, and the day when two ancient scholars sat down to record the Hindu scripture Mahabharata. More to the point for gold speculators, it is by tradition a day of auspicious beginnings and a lucky occasion for buying material goods or gifts. Like Western marketers hijacking Christmas, the Indian gold machine has deftly turned Akshaya Tritiya into one of the year’s primary shopping occasions.

So by all means, gold investor, read the financial page tea leaves. But don’t forget how the other half buys. Expect strong demand until mid-May, after that the stormy season. 

Also see:

Why the Markets Look Safe Until Summer

Where is the Larger Bubble, in Stocks or Bonds?

Jaguar's Flexibility is Fueling AMD's Turnaround



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