Panic, depression, rage, suicidal ideations: watching the US mainstream media, one would think that these are the prevailing sentiments among those who unlike the prevailing “developed world” speculative class, are invested most heavily in physical old – Indians, who collectively comprise the largest end-demand consumer segment for gold products. One would be very wrong.
Because while apparently it is incomprehensible to the “sophisticated” financial crowd in the US that someone may have conviction in their beliefs, and not just lunge from extreme to another, merely riding momentum and technicals like so many “professional” investors, Indians are doing precisely what a buyer should do when the price of the desired product plunges: doubling down, literally.
Bloomberg reports of the immediate aftermath to the past few days’ gold plunge: “Gold buyers in India, the world’s biggest consumer, are flocking to stores to buy jewelry and coins, betting a selloff that plunged bullion to a two-year low may be overdone.” Wait, so instead of jumping out off high buildings, Indians are being cool, calm and collected and… buying more? Unpossible. Do they not get CNBC in Mumbai? Apparently not: “My daughter is just six months old, but I think it is never too early to buy gold,” said Sharmila Shirodkar, a 28- year-old housewife, while displaying a new pair of earrings she bought from a store in Mumbai’s Zaveri Bazaar. “I had been asking my husband every day if prices will go down more. I couldn’t wait anymore.”
Indeed – the buying frenzy in India has been unleashed:
While the drop in gold prompted investors worldwide to pare holdings in exchange-traded products, surging physical demand in India may help stem the 17 percent slide in prices this year. The plunge after rallying for 12 straight years may make bullion more affordable to Indians, according to Mehul Choksi, chief executive officer of Gitanjali Gems Ltd. (GITG), the nation’s biggest retailer of jewelry and diamonds by sales.
“This is a perfect time to buy as prices will only go up from here,” said Vishal Mehta, a 33-year-old garment dealer, while ordering coins from Choksi V. Naginchand & Co. in Zaveri Bazaar. “I usually buy one gold coin a month, but this time I am buying two.”
Hence the true value of the word “double down”. Here is another word US “investors” can learn from the Indians – value.
“It has been very hectic in the last two days,” said Deepak Tulsiani, owner of Dwarkadas Chandumal Jewellers in Mumbai as he surveyed his 11 employees, who were busy with customers. “There has been a rush to buy gold because now people are getting jewelry 15 percent cheaper than before. It’s value for their money.”
Zaveri Bazaar, the largest bullion market in the country, buzzed with customers, who were browsing through collections of bangles, bracelets, necklaces and rings displayed in trays ahead of the wedding and festival seasons. Most buyers were women in groups of two or more, accompanied by a male who paid the bills.
“Whatever be the price, Indians buy gold because it is an age-old tradition,” C.P. Krishnan, a director at Geojit Comtrade Ltd., said by phone from Kochi. “It has become an unavoidable expense during weddings and festivals. With the sudden crash in prices a lot of buying is happening across India as people are thinking of it as a golden opportunity.”
Yes: tradition! That’s what the Chairman said too. And the chairman is never wrong. Even when he is selling the synthetic paper representation of that tradition and in the process allowing all those who trade on “value” and not “moment” to average down in terms of infinitely dilutible fiat paper.
Back to India:
“Some customers are still scared to buy now as they feel the price will go down more,” Chetan Ranka, owner of Choksi V. Naginchand, said after answering a call from a prospective customer on one of the four phones at his desk. “I have received more than 250 calls on Monday inquiring about the prices. Normally I get maybe 50 calls a day.”
The lower gold drops, the more people will buy.
“I had been keeping a tab on gold prices daily by reading the newspapers,” Sakshi Jain, a 39-year-old housewife, said as she held an intricately designed necklace against her neck in front of a mirror in Zaveri Bazaar. “I had some wedding purchases to make and as soon as prices dropped I came to buy.”
And the rub: once the correction is over, and prices resume their inexorable rising, the double down will become a buying frenzy, as everyone will realize one simple thing. Just because the BLS says inflation is has not arrived, it merely means the central banks, who are laboring under some $40-50 trillion in excess debt, will have no choice but to also double down. And one of these days not even the BLS’ best efforts at fudging reality will fail.
Incidentally, they are already are. As the MIT’s Billion Prices Project shows, there is just a slight disconnect between reality and what is being spoonfed.
Finally, for some actual numbers, we go to Bank of America which has calculated that the disconnect between the paper selloff and physical buying spree can only last so long before gold shoots right back up to $2000 as the surge in buying overwhelms the paper selling.
With prices now below $1,500/oz, we expect a pick-up in jewellery demand in the medium term and see considerable pain for miners should prices dip below $1,200/oz. As such, we believe the downside to gold prices may be limited to an additional $150/oz. In fact, we estimate that jewellery demand may become so pronounced by 2016 that prices could trade above $1,500/oz even if investors remain net sellers. Looking at sensitivities from a different angle, investors would need to buy merely 600t of gold to sustain prices at $2,000/oz by 2016, compared to non-commercial purchases of 1,798t in 2012.
And some more thoughts from BofA:
Cyprus’ announcement to sell nearly 14t of gold reserves was a key trigger behind the recent collapse in gold prices, as it raised concerns that other peripheral nations may follow suit. Given our estimate that every $45/oz represents a net sale of 100t, the move over the last two days would suggest net sales of 480t, or about 20% of yearly mine supply. In short, the market seems to have discounted the combined future gold sales of Portugal and Greece. As we believe additional gold selling in the European periphery is highly unlikely, we find it hard to fully justify the sell-off.
So please go ahead and sell. All we can say is, well, thanks.