Falling out of Love with Gold - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 17 August 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
India has been the largest consumer of gold for quite some time. Holding gold as a store of wealth has always been a significant part of our culture. In recent years, the ability to invest in gold electronically has led to a huge rise in gold investment and demand. Given our large population, it is no surprise that we are the largest consumer of gold.

But that is all about to change. This year, China is set to overtake us as the largest global consumer of gold. What is even more interesting is that China's gold demand has actually fallen by 7% this year. Thus, it must mean that our gold demand is falling even more. The most recent report has revealed that Indian gold demand has fallen a staggering 30% from a year ago. The demand has fallen both for consumer products like jewelry and gold investment products.

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So why we are buying 30% less gold as compared with a year ago? There are a number of reasons. The most important is the price. Gold prices have been fairly high, and due to the depreciation of the rupee, it is near record levels in rupee terms. The high price of gold is one of the biggest reasons we are buying less.

Other reasons for the falling gold demand include falling GDP growth and negative economic sentiment. Despite gold's role a safe haven asset, demand is fairly cyclical given that it is a luxury product. This means that demand is higher when economic growth goes up, and vice versa. Governments have also made efforts to reduce gold imports, and this is contributing to the fall in demand.

Do all these factors really mean we are falling out of love with gold? Chances are that this is not the case. Most of the fall in gold demand is attributable to economic factors such as high gold prices and lower GDP growth. It is not due to a change in preferences, i.e. we don't view gold any differently than we did a year ago.

It is very likely that gold demand will pick up if economic growth picks up. If the rupee recoups its prior losses, gold will fall in rupee terms and this will also be positive for demand. None of this may occur anytime soon, so there is no indication that gold demand willstop falling in the meantime.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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5 Responses to "Falling out of Love with Gold"

PRABHAKAR

Aug 27, 2012

whatever say by newspaper & any authority. savings in gold will not stopped in india. it may reduce in percentage of volume but every indian will purchase gold.gold is the only saving tool in villages. they dont know share & mutual funds
rate on bank interest also not much attractive compare to the increasing rate of gold

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PRABHAKAR

Aug 27, 2012

i thought ,gold again will take jump here onword, because the mentality of common man is to save only in gold. gold works two ways.one for fashion or say some status symbol and it comes in use during emergency.

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shaheen mohmad ashraf

Aug 23, 2012

no mr asad you r wrong , economy has nothing to do with falling demand becoz we didnt see any fall in income level , there has been no recession as in america and europe , may be people think they hav brought enough second law of marginal utility , may be the reason

Like (1)

Dipesh

Aug 19, 2012

Me thinks it's time to short gold the yellow metal has gained a lot

Like (1)

anil k devnani

Aug 19, 2012

it is not clear if the 30% drop is in value terms (rupee) or in quantity (kgs).

Like (1)
  
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