Indian gold sales will prove an error

India has actually turned into a net exporter of gold because so many hoarders are cashing in their gold. India imported no gold in February and probably will not in March either, reported Reuters.

In 2008 gold imports fell by half to 396 tonnes as the selling of gold for scrap grew. This does help to explain why gold prices have not soared higher in the ongoing global financial crisis as a key source of demand has vanished.

Retail sales falling

Sellers might also be right in so far as the jewelry market for gold – still its largest use – is going to come under severe pressure as retail consumers cut back purchases of luxury products. Just look at those empty outlets for Cartier and Warren Buffett’s concern at plummeting jewelry sales at Berkshire Hathaway.

That said yields on Indian government bonds are rising putting a squeeze on bond prices, and in a world of competitive devaluations cash may not be the best place to keep wealth.

On the other hand, Indian retail gold buyers have been quite good predictors of gold market moves in the past, and their reluctance to buy could signal a short-term bear phase for gold prices.

However, such are the contrary forces from global investors looking for a safe haven asset that at present Indian sellers are being matched by global buyers.

And it should be remembered that investment capital flows around the world could easily out-spend Indians in the gold market by a huge multiple. Thus any setback to the gold price is likely to be small and short-lived.

Bear market rally

The global forces of money printing and public spending are working for gold while the rally in stock markets must surely shortly draw to a close. The question then is whether all assets will come under fire, as last autumn, or whether we will see a more discriminating sell off.

For the moment most holders of gold and silver would not want to risk being out of the market because the risk of missing out on a big surge of investment into precious metals is too high, and the downside looks relatively small. Indians do not seem to be thinking this way.