Indians' love for Gold is well known. The yellow metal has been a traditional store of wealth. For generations, people in rural India in particular have parked their savings from agriculture in Gold. There was no other choice as they never had access to formal a banking system. It won't be too far off the mark to say that demand from India's farmers is a big driver of the international Gold price. However, this exposes Gold investors across the world to the risk of India's unpredictable monsoon. Rural Indian Gold demand is almost entirely dependent on a bumper harvest. As over half of India's arable land is not irrigated; Indian Gold demand is strongly correlated to the monsoons .
This year has been tough for India's farmers. Poor summer rains has severely impacted the Kharif crop. The unseasonal winter rains have added to rural India's woes. It has become clear that Gold demand will take a hit in 2015. On the back of a 14% fall in demand in 2014, demand is estimated to fall by another 15% this year. The government's efforts to discourage consumption in order to contain the current account deficit, has also impacted sentiment.
We believe this could act as a dampener on international Gold prices this year. Investment demand via ETFs is already subdued. At the same time, the prospect of the US Fed hiking interest rates later this year looms large. Speculators have long since abandoned Gold as an asset where quick profits can be made. However, this bodes well for long term investors. Low Gold prices allow serious investors an opportunity to enter at attractive levels.
Factors like monsoons and the decisions of the US Fed cannot be predicted. We believe it is a good idea to hold around 10-15% of your wealth in Gold as an insurance against difficult economic conditions. Investors would be well advised to ignore the short term noise regarding Gold prices. Instead view Gold as a long term store of value and as means to protect your wealth from the recklessness of global central banks