Why the Indian Market Buys Gold When the Price is Falling

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The short response to such a question is that they aren’t. They are buying gold in Rupees, whose price has been stable as the gold price fell in the U.S. dollar. Because the Rupee is falling, gold has appeared to hold steady in the Rupee.

The short response to such a question is that they aren’t. They are buying gold in Rupees, whose price has been stable as the gold price fell in the U.S. dollar. Because the Rupee is falling, gold has appeared to hold steady in the Rupee. Because Indians see the Rupee as a problem there is even more incentive to buy gold for the security of their daughters as they enter marriage. But in this essay we also look at other currencies where gold has done its job of holding up when local equities have fallen.

In the Eurozone recent weeks have seen the euro fall from $1.60 to the present $1.25 a fall of 22%. This is the time that gold has fallen in the U.S. dollar from $900 to $700, a fall 22%. However, look at this another way. In the euro, gold has remained steady at +euro560 of late.

Four of the most important gold markets in the world are India, South Africa, Canada and Australia. In recent weeks all four of the currencies has fallen as the dollar rose. All four countries have been the darlings of the ‘carry trade’ where cheap money was borrowed in the States or Japan to invest in these high interest-paying currencies.

  • In India the Rupee has fallen from Rs.40 to nearly Rs.50 to the U.S. dollar, a 25% fall.
  • In South Africa the Rand has fallen from R7 to R11.5 a 64% fall.
  • In Canada the ‘loonie’ has fallen from C$0.98 to C$1.27 a nearly 30% fall.
  • In Australia the A$ has fallen from A$1.00 to A$1.57 a 57% fall.

Now consider how far gold has fallen since these currencies were at their highs. The gold price was just below $900 so let’s take $900 as the level on which we base our numbers. It is now at $700. This is 22% fall in the gold price. This means that the gold price in these currencies has performed as follows:

  • At Rs.40: U.S.$ the gold price was Rs.11,574 for 10Grams [the usual unit price for gold there. Now it is Rs.11,252 nearly the same as earlier in the year. That is why Indians are buying now. The price has stabilized in their currency and as an incentive their currency has weakened in gold terms justifying more gold purchases.
  • AtR7.00: $1 the gold price in Rands was R6,300 an ounce. At R11.5 and $700 the gold price in Rands is R8,050 an appreciation of nearly 28%.
  • In Canada at C$0.98 and gold at $900 the gold price was C$882. After the fall to $700 and C$1.27 it stands at C$889 up C$7.
  • In Australia at A$1 and gold at U.S.900 it was A$900 and now it isA$1,099 a 22.1% appreciation.

For India, a gold buying nation, gold is steady in the days before the important gold buying festival of lights, Diwali, and subsequent festivals. In the remaining three gold producing countries producers are encouraged by their local currency gold price, as it is the price in which they are paid.

In all those countries gold is providing that wealth-retaining role that is expected of it. And that is in a market where the gold price is falling far too much and is soon likely to recover. Imagine a recovery back to over $1,050, a figure that is more than on the cards and you have an additional 50% rise in these numbers. We have to qualify this and say that we do expect these currencies to appreciate as gold rises. Nevertheless, gold will perform wonderfully, in this event.

Once the rise in the dollar is complete as the demand for the dollar is met by increasing liquidity, expect the gold price to rise more and show again how in a weakening currency gold is a great investment.

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