Gold bear is no match for Indian brides

On Friday Oct 24, 2008, cash gold had an "outside reversal day." That is, a lower low. but a higher high and a higher close than on Thursday.

That was unique among the commodities. Furthermore, gold managed to go up even though the S&P 500 Index was down 3%. That may be unprecedented.

Traditionally, the role of India, by far the world's largest bullion importer, judging the state of Indian demand by the premiums to world gold shown in the domestic Indian gold market. It's worked well in the post-2000 gold run-up and has even caught recent rallies.

Late last week, reported Indian premiums became huge. "With the exception of the late August/early September period this year, premiums like this have never been seen since the Indian gold trade was liberalized in the late 1990s."
The Indian currency, the rupee, has slumped 10% this month. That is why the premiums that appeared in late August at $800 did not reappear until gold reached the low $700s last week.

This past weekend, a couple of recent Indian newspaper stories documenting the recent demand surge for physical gold. Conclusion: "Unless the rupee collapses, pushing world gold down further will be extremely difficult."

Unfortunately, that trend line was part of a bear market channel that the Privateer was obliged to establish a couple of weeks ago. And the drop it reversed was the biggest shown on this chart, which goes back to 1982. See chart below.

The Privateer's commentary raises an issue which has been intriguing, and frustrating, the gold bug community. It complains of "the huge 'shear' between the price of 'paper gold' on the futures markets and the almost total unavailability of physical gold in the REAL markets. Gold of any nature, whether bar or bullion or numismatic coin, is all but unavailable at ANY price and has been so for nearly three months now. And when it is available, the prices being asked by the sellers bear no resemblance to the prices being quoted in the futures markets. A cursory glance at the U.S. site eBay [where there's a secondary market in gold coins] will show this clearly."

Why is this occurring? Because the refineries cannot handle the conversion of central bank 400-ounce bars into the sizes and shapes the public buys fast enough to meet their demand.

Arguably, this physical offtake is countering the central banks' widely-rumored effort to break down the gold price by massive dumping, aimed at eliminating a symptom of financial system stress.

None of this will frighten the Indians. They buy gold because their brides wear gold jewelry.

But, India-watchers say, Monday Oct 27, 2008 is the key Hindu festival of Diwali

Indian retailers are hoping that volatile stock markets will drive demand for gold coins, medallions and bars rather than just jewellery during the peak festival season in the world's largest market for the precious metal.

Key commodities are going up, the weaker dollar is driving investors back in.

Though international gold prices have fallen below $800 an ounce, the price level that triggered a buying scramble in August, consumers are buying only as much jewellery as they feel is needed for festivals and marriages.

"People are waiting for prices to fall still further," said Pawan Choksi, an Ahmedabad-based bullion dealer. "Lots of investors have changed their preference from buying jewellery to gold coins."

The World Gold Council recently estimated the size of India 's gold coin market at about 100 billion rupees ($2 billion).

Popley Jewellers, a prominent domestic jewellery chain, said that for the first time it launched gold coins during the festival season under the name "Popley Swiss Gold." "The bullion part of our business has certainly picked up, and we are hopeful the jewellery part will also soon pick up," said Rajiv Popley, director of Popley group.

"Our bullion sales have increased by 35 percent over last year in terms of weight," he said, without disclosing specific figures.

Many corporates bought small gold coins as gifts during Diwali when the gold price fell to around $700 last week, Popley said.

Diwali, the Hindu festival of lights, was celebrated on Tuesday. It is considered the most important festival among a string of others that begin in September, when it is considered auspicious to buy gold.

Traditionally, gold buying slows after the festival, but continues at a moderate pace in the marriage season, during which families gift brides gold as lifetime savings.

Ajay Mitra, managing director of the World Gold Council's India office, forecast the coins business would see revenues of about 3 billion to 5 billion rupees ($62 million to $103 million) over the next six months on sales of about 75 to 76 tonnes.

Mitra said revenues were likely to reach 10 billion rupees over the next three years. Global financial market turmoil has rocked Indian stock markets, driving the main index <.BSESN> down almost 47 percent in 2008 as foreign funds withdraw.

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