When it comes to commodities such as gold bullion, there are several criteria that ultimately determine the price level. Many times, I have discussed the impact that easy monetary supply, commonly known as money printing or quantitative easing, has on the economy. Quantitative easing is a well-known phenomenon theses days, and the current environment is interesting in that numerous central bankers around the world are engaging in the same monetary policy, trying to print money to solve short-term problems, irrespective of the long-term side effects.
In my article “Gold Bullion Forecast for 2013,” I stated that, when considering the level of monetary policy stimulus worldwide, it is highly likely that gold bullion will exceed $1,800 shortly, with a strong possibility for gold prices reaching $2,000 an ounce in 2013.
However, new information makes this prediction even more probable. The demand side of the equation for gold prices is extremely important. India has long been a huge consumer of gold bullion. Recently, however, because of the weak rupee, India’s currency, gold prices in that nation have been at all-time highs. This has led to lower levels of gold bullion buying and, earlier in the year, a strike by gold bullion dealers to protest an import tax imposed by the government on gold bullion.
In spite of lower than normal gold bullion demand by Indian buyers, gold prices have remained extremely strong. A new report by the World Gold Council’s India office stated that they believe Indian demand for gold bullion in 2012 will end up reaching approximately 800 metric tons, a substantial increase from earlier estimates of 650–750 tons. (Source: “India 2012 gold demand likely to rise 23%,” MarketWatch, November 27, 2012.)
India’s government has been trying several tactics to reduce gold bullion imports, which weaken the country’s current account deficit. In spite of the government’s attempts, such as preventing banks from issuing loans on gold bullion purchases and hiking the import tax rate, the earlier drop in demand has not led to a sustained decline for gold prices. It appears that Indian demand is coming back on line, especially with the wedding season and holidays in full swing.
Chart courtesy of www.StockCharts.com
If Indian gold bullion buyers resume their normal level of purchases, we should see this demand translate into higher gold prices. Knowing that the Indian demand for gold bullion was lower than usual for most of this year, any increase back to normal levels should help propel gold prices above $1,800 an ounce.
Of course, Indian politicians may try once again to impose restrictions on importing gold bullion. Over the short term, this might have the reverse effect, causing a large amount of demand ahead of any new rules and restrictions. Time will tell; however, the long-run implications of Indian gold bullion demand resuming normal levels is clearly a bullish sign.
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