Gold Markets are not Efficient, Don’t Reflect Fundamentals & Understate Gold’s Market Value (part 5)

Posted by Julian D. W. Phillips: Gold/Silver Forecaster

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Indian Imports & Temple Gold

We feel it important to raise this topic once more in this series because Societe Generale, the French bank has stated that if the Indian government does not handle this matter well there could be a run on the Indian Rupee.

Why? There’s no doubt that if the Indian gov’t could harness locally owned gold (total around 25,000 tonnes). The currency would then be the best backed currency in the world and shouldn’t suffer declines if its gold were used as collateral for its foreign currency needs. The trouble is the Indian people would be furious and the gov’t would most likely lose the next election (because of the feelings the Indian people have towards gold).

So, with elections due next year, they’re currently exploring ways to achieve this without creating uproar. Hence temple gold, where there are around 2,000 tonnes of gold held by them overall. Much of this is already stored in banks in the country, so technically represent unsecured loans to the banks. Again technically, as in the world of unallocated gold in the developed world, the banks/government can already access it (provided they can return it).

So the warning by Societe Generale is quite right. On the one hand, such moves could create uproar and on the other, the signal would go to the rest of the world that India was in deep financial trouble and could not reduce its Current Account Deficit paving the way for a major debt to reserves ration problem.

We think this is coming anyway.

Last month’s imported gold to India was 7 tonnes and the month before 3.5 tonnes, when these figures should be close to 100 tonnes and 70 tonnes respectively. The result is that the premium on an ounce of gold has jumped in a volatile manner from as low as 5% to current levels of around 140%. We believe that smuggled gold into India is rising fast and accounts for the overall volatility of these premiums. We expect a far greater figure than 250 tonnes to be smuggled in.

This raises several issues for gold and India’s global monetary situation:

1.   We believe the gov’t will adjust policies if they see those adversely affecting votes. This translates into a lowering of the import duty and current requirement to export 20% if imports of gold ahead of the elections.

2.   The Current Account Deficit has already created a Rupee/debt to reserves crisis which is expected to worsen. Expect an int’l credit crisis that will appear in time. The crisis has been slowed through the temporary use of swaps and gold import restrictions. There is no visible sign of effective action to halt the underlying crisis.

3.   With 25,000 tonnes of gold, India only needs to use a small portion of this to give it time to try to resolve the crisis fundamentally. We cannot see how they will resolve India’s economic/monetary crisis, but at least gold will give them time to try.

4.   The harnessing of locally-owned gold will happen; it is simply a matter of time and method. This will be a form of confiscation even if gov’t and its agencies continue to recognize the original owner with an eventual promise of returning it.

Summary of India’s Situation on the Gold Price:

– India could well be among the first countries to take citizen’s gold to support their currency, but certainly not the last. It will monetize its gold to some extent and provide a preview of what’s to come when the Chinese Yuan becomes a reserve currency.

– The absence of direct Indian demand is falsely holding down the U.S. dollar price of gold at the moment.

– It is also preventing global demand from overtaking global supplies, thus stopping the gold price from returning to record highs.

And in so doing, India will lead the way into what we see as a new monetary order with gold taking a pivotal position in that reformed system!

In the final part of this series we will look at the consequences that will inevitably come with management, manipulation and speculation and how China fits into this picture and discuss the demand and supply picture now developing that will change the gold price dramatically!