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TheStreet Open House

Gold's Fortunes Tied to India

NEW YORK ( TheGoldAndOilGuy.com) -- One of the top stories in the financial markets in 2012 has to be the stagnation in the price of gold at around $1,600 an ounce, which is down approximately 17% from its peak at $1,920.30. Those bullish on the yellow metal have been disappointed in gold's performance while those bearish on the shiny metal have reveled in its stagnation, saying that gold's status as a safe haven is over.

What is behind gold's sluggish performance in 2012? There are several reasons, but one of the key fundamental reasons has been the lack of demand from traditionally the largest buyer of gold on the planet: India (although China will surpass it this year). India bought only 181.3 tons in the second quarter of 2012, a 2-year low, according to the London-based World Gold Council.

One reason Indian demand for gold has fallen is the sharp drop in the value of its currency, the rupee, which is down by 25% vs. the U.S. dollar this year. This decline has kept gold prices high in relative terms while the actual dollar value of gold was falling.

Perhaps even more important has been the "war" declared on gold by its central bank, which has blamed all of the country's economic ills on Indian citizens' traditional buying of gold. In an attempt to slow down gold and silver imports, the Indian government has imposed new taxes on the purchase of these precious metals.

But even though demand for the precious metal is way down in India, the situation still offers hope for gold bulls. Why? Because we've been here before -- in 2009 to be exact.

In early 2009, the Indian economy and rupee tanked. Gold demand almost completely dried up. According to precious metals consultancy GFMS, Indian demand for gold in the first quarter of 2009 collapsed by 77%. For the full year GFMS said Indian consumption dropped by 19%.

Now with the Indian economy slowing to its weakest growth rate in nearly a decade and the rupee falling, we are seeing a replay of 2009. The monsoon season has been poor, hitting farmers -- among the biggest buyers of gold -- hard. Gold prices have hit a record high in rupee terms, and India is expected to purchase, as forecast by the World Gold Council, only 750 tons of gold, down 25% from 2011 levels. Meanwhile, the WGC forecasts that China will buy 850 tons of gold this year.

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