Commodity Trade Mantra

Rising Strength in the Rupee will take Gold off the Indian Investors’ Radar

Rising Strength in the Rupee will take Gold off the Indian Investors’ Radar

Rising Strength in the Rupee will take Gold off the Indian Investors’ Radar

The rupee rose to its strongest in 11 months against the dollar on expectations of continued robust foreign buying in domestic shares and debt after the Bharatiya Janata Party, led by Narendra Modi swept the country’s elections to a thumping victory. Surpassing 25,000 for the first time on the day of counting, the benchmark Sensex jumped 4.9% last week. Gold climbed for the first time in three days in London on speculation the new Indian government will relax import restrictions on the yellow metal. The new India finance minister will decide on easing gold import curbs, Reserve Bank of India Governor Raghuram Rajan said last week.

“Development” the only agenda & solution for India: Modi –

As Narendra Modi’s opposition bloc secured the largest electoral victory in 30 years on May 16, the biggest gainers in India’s equity market were the companies likely to benefit most from a strengthening economy. The shift underlines the growing conviction that Modi can replicate the economic success he enjoyed in Gujarat state when he takes over as prime minister of the most-populous democracy. The value of Indian equities has climbed by $371 billion, or 37 percent, since the Bharatiya Janata Party named Modi as its candidate for prime minister on Sept. 13. Foreigners bought $14.4 billion of shares during the period amid speculation Modi will do more than the outgoing Congress Party-led alliance to revive economic growth from near the weakest pace in a decade. “Development is the only agenda that can save the country,” Modi said in a victory speech in Gujarat during which he also called for an end to divisive politics. “Development is the solution to all problems, development is the cure for all diseases,” he told thousands gathered there. India must create 10 million jobs a year, four times the pace of the last 5 years, to absorb youth into the workforce. The election results echoed the sentiment of millions of those who believed Modi’s promises of economic growth to meet the demands of millions of youngsters who reach working age each year and could boost India’s productivity if given jobs.

From Reuters

After a decade in opposition, the BJP has promised to repair an economy growing at its weakest rate since the 1980s and tackle stubbornly high inflation. However, the most urgent challenges facing the government, from a large budget deficit to concerns that the El Nino could devastate agricultural output, have no easy solutions.

The five of the biggest tasks:

1. DELIVERING A BUDGET THAT LIMITS THE DEFICIT

2. NARROWING THE CURRENT ACCOUNT DEFICIT

3. DEALING WITH RBI AND EL NINO

4. REVIVING PRIVATE INVESTMENT

5. RECAPITALISING STATE-RUN BANKS

 

Rupee hits 11 month high on BJP euphoria –

Responding to the news, Indian stock markets got off to a roaring start, with the rupee breaking below 59 to the U.S. dollar. The rupee rose to its strongest in 11 months against the dollar today. At 10:28 a.m., the rupee was trading at 58.45 per dollar, after hitting 58.38, its strongest since June 18, 2013. The rupee rose 2.1% last week, its third consecutive weekly gain and also its biggest weekly rise since Sept. 13. The pair had closed at 58.79/80 on Friday. Currency traders expect dollar buying to come in from the Reserve Bank of India which may limit broader gains in the rupee in the near term.

Faster Growth, Investment & Credit Ratings Upgrade Prospects for India –

Surpassing 25,000 for the first time on the day of counting, the benchmark Sensex jumped 4.9% last week. The broader Nifty, which also scaled a fresh peak on Friday, rose 5%. In 2014, overseas investors have so far invested 6.5 billion rupees in Indian equities, contributing to a 14% gain in the main stock indices.

After last week’s rally, Deutsche Bank raised its December 2014 target for the BSE Sensex to 28,000. Macquarie raised its 12-month target for the Nifty to 8,400 from 7,200. But with India’s economy suffering its worst slowdown since the 1980s and battling high inflation, it will not be an easy task to meet the hopes of millions of Indians who have bought into the idea that Modi will quickly push their country onto the top table of global economic powers.

Ratings agency Standard and Poor’s has said India’s fiscal, economic reforms to determine credit rating.

S&P is the only of the three major credit agencies to have India with a “negative outlook” for its “BBB-minus” rating, meaning any downgrade would send the country to below investment grade. The fiscal and economic reforms taken by India’s new government in the next two to three months will have “significant implications” on India’s sovereign credit rating, Standard & Poor’s Ratings Services said on Friday. The S&P statement came after the Bharatiya Janata Party and its allies were headed for the biggest victory the country has seen in 30 years. S&P added the next government would need to regain “fiscal prudence in a sustainable way,” such as by implementing a goods and services tax to help stabilize government revenues. If confidence rises, investment and consumption in India could strengthen, after being held back by the uncertainty surrounding the election.

India’s expectations from the new government –

It’s important to be realistic about how quickly they can instigate change. Firstly, it takes time to get economic reforms through the political machinery and then, it also takes quite a while before economic reforms actually have a positive impact and display the desired results.

Modi had promised that, if elected, he would take decisive action to unblock stalled investments in power, road and rail projects to revive economic growth. Tax and labor market reforms, backed by a gradual opening up to foreign investment, would seek to create the 10 million jobs that Asia’s third-largest economy needs every year to absorb young people entering the workforce.

Gujarat drew 1.3 trillion rupees of planned foreign and domestic investment; about 22% of India’s total, in the year ending March 31, 2012. Investment proposals nationwide fell to about $95 billion in fiscal 2012 from a peak of $289 billion two years earlier, according to the latest data from the commerce ministry. India’s economic growth slowed to 4.5% in the year ended March 2013, the weakest pace in 10 years, and the government estimates a 4.9% rate in the year that ended March 31. With the BJP-led alliance winning 336 of 543 seats up for grabs, more than the 272 required for a majority, Modi has a “much greater chance” of making changes needed to boost investment. “They are starting to pick up on the back of a cyclical recovery and are likely to be notable beneficiaries of an investment revival,” said Lim, who helps Aberdeen oversee $322 billion worldwide, reported Bloomberg.

Less government and more Governance –

The BJP’s landslide win has raised the chances of “more decisive policy action,” Masha Gordon, the London-based head of emerging-market equities at Pacific Investment Management Co., said. India’s credit rating may be considered for an upgrade if the new government cuts the budget deficit, simplifies rules on investment and builds infrastructure, said Atsi Sheth, a sovereign analyst at Moody’s Investors Service in New York. Moody’s has a Baa3 rating on the nation, the lowest investment grade.

All said and done – Unlike his predecessors, Modi will not have to deal with unruly partners as he implements reform, due to the vast majority in the elections. He will try to replicate his success in attracting investment and building infrastructure in Gujarat, the state he has governed for more than 12 years. He has been saying “Less government and more Governance,” and we are really likely to see that. He can afford to have a smaller but stronger cabinet, and that means a far more decisive government.

Gold Import Restrictions may take time to be done away with –

Analysts look for gold-import restrictions in India to ease following the election of a new government, although later in the year. There is the possibility that the new government may scale back some of those import restrictions, But that’s surely not going to be one of the first things on their agenda. They will have to keep in mind and make sure the current account deficit does not start widening again. India historically has been the world’s largest gold-consuming nation before China took the top spot for the first time in 2013 on a combination of its own strong demand and strict measures implemented by Indian authorities to curb the amount of gold imports due to a ballooning CAD. Import duties on gold rose several times last year; they currently stand at 10%. Any easing of restrictions in gold imports may start with the so-called 80-20 rule, as this has been considered the most controversial of all. There is also the danger of imports in various other products rising fast in the initial stages of a rising economy and reducing the gold import curbs at this stage could mean a huge potential for the current-account deficit to start widening again, even more rapidly. It’s expected be a slow process as the new story unfolds. There are more pressing concerns for gold in the near-term as I point out to further, than India’s gold import tariffs.

India’s Gold jewelry exports on the rise again –

Gold jewelry exports from India rose for a third consecutive month in April as raw material supplies improved after the Reserve Bank of India (RBI) allowed more banks to import bullion. India imported 50 tonnes of gold in March & 30 tonnes of gold in April, which acted as a buffer for the following months.

Struggling with a ballooning trade deficit, India last year imposed a record duty of 10% on overseas purchases of gold, the second-biggest expense in its import bill. That hit gold jewelry exports, with shipments in the fiscal year that ended in March dropping around 40%. Jewelry exports in April continued to build on a firm trend, registering a 14.69% rise to $604.42 million, the Gems and Jewelry Export Promotion Council said. The amount of gold jewelry shipped by India is directly related to its imports after the country enforced the so-called 80/20 rule in July, making it mandatory to export a fifth of all gold imports. The RBI has recently indicated that it aims for a slow and steady removal of restrictions as the current account deficit comes under control.

Gold and Silver markets manipulated to maintain Dollar strength “Show” –

The gold and silver markets are manipulated to keep their prices low, not just for the gains from the huge shorting in the futures paper markets, but for a far bigger reason. And that is to keep up the show of strength in the fiat currency – the US dollar. The precious metals market is, by far, the most manipulated market in the world. WHY? The Fed really doesn’t have much of a choice because if gold and silver were allowed to trade freely, it is highly likely that the dollar would have been rejected as the world’s reserve currency a couple of decades ago. Anyone who refuses to acknowledge that the gold and silver markets are highly manipulated is either completely ignorant of the facts or is a sociopathic liar.

I will not get into why the dollar & its future as the world reserve currency is doomed here as a lot has been said & discussed about it earlier and again will be as and when the situation or economic developments demand to.

Here are a few links that will explain why:

The Dollar 15-Year Cycle Decline Should Favor Gold

Russia On The Verge Of Dealing A Massive Blow To The Petrodollar

The U.S. Dollar Under Siege – Long-Term Financial Implications

Why will Gold remain off the Indian Investors’ Radar?

I know, I am writing on a topic that many may not approve of in India, but this is some fact that may not be avoidable. Indians have a die-hard passion for Gold which has maintained India’s number-one position as the World’s largest gold consumer till a year ago. This however, has also contributed to being the second largest cause for India’s large Current Account Deficit.

Now with so many reasons for the dollar to fail and fall, while at the same time with so many reasons (as explained above) for the Indian rupee to gain and rise, here comes the big question. Why would gold prices denominated in rupee terms, rise further hereon?

Let me take you back in time. In April 2012, Gold prices slumped by 20% to $1525 from $1921 on the Comex while at the same time zoomed up by 20% to Rs. 33,517 from Rs. 28,200 per 10 grams in Sep 2011. Why? The sharp decline of around 25% in the Indian Rupee versus the US Dollar (just till April 2012) was the only cause for the sharp rise in Gold Prices in India since 2011. Comex Gold Futures had hit a record high of around $1921 in Sep 2011 when the Indian Currency – the INR was around 45 to the US Dollar. The Rupee had started its sharp downward journey from 45/US$ since Sep 2011 & hit 58/US$ in April 2012 – a fall of over 25%. The rupee further slumped close to 69.76 versus the US dollar in 2013 which kept the Indian gold prices pretty close to the Sep 2011 levels of Rs. 28,200 per 10 grams in Indian markets despite a huge crash to $1180 on the Comex.  The rupee has recovered handsomely from the depths seen in 2013 and we are again now at the April 2012 levels as far as the rupee is concerned, that is at around 58.50 today.

With all the new political and economic developments happening in India as stated above, I presume that the worst has been over for the rupee and should gradually recover to pre-2011 days. In these circumstances, I really wonder why any investor would resort to gold investment, which is generally much sought after as a safe-haven against currency crashes and economic disasters. India is now looking forward to a better future which lays out much more lucrative investments producing better returns, but I would surely include silver in that portfolio – the reasons for which I have explained earlier and will also focus upon in my forthcoming article.

The above explanation does not mean & nor do I intend to say that gold prices will not rise. What I mean is that gold bullion prices in US Dollar terms will explode but the same effect may not be completely translated into the gold prices in Indian markets. Comex gold prices are bound to rise sharply as soon as the US dollar starts descending, but the same descent will also be seen against the Indian rupee which will keep MCX gold prices in check. Gold prices in India, at best may remain range bound, unless there is some drastic economic blunder seen in the Indian markets.

As for the western world & investors, we are already seeing a much higher demand for silver than gold. Higher unemployment, lower income from part-time jobs & higher inflation will drain any excess cash out of the individual’s gold investment capacity. To add to the woes, dollar devaluation (sure to occur) will spike gold prices, way out of the common man’s reaches. Additionally, the world’s second largest consumer of gold, India will yet have large gold import curbs for quite some time to come and also have more lucrative options than gold.

THINK…

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