How Serious are China and India About Their Gold?

Wall St. Cheat Sheet

Despite the Dow Jones Industrial Average and the S&P 500 suffering their worst day of the year on Tuesday, precious metals were able to decouple and climb higher. Gold futures for June delivery increased almost $17 to settle at $1,660, while silver gained 16 cents to close at $31.68. Although gold prices declined in March and had the media buzzing once again about a possible bubble, the world continues to be more interested in precious metals than ever before.

Outside of the United States, countries take their gold business very seriously. Earlier this week, a 30 year old Chinese woman was given the death sentence by a court in Wenzhou. According to Xinhua news agency, Wang Caiping cheated investors out of 100.11 million yuan, losing 94 million yuan in futures and gold trading. Xinhua explained that she borrowed the money in 2010 promising to invest in equipment and property, but used the money instead to speculate in futures and gold trading with her brother. Caiping’s defense lawyers claimed the investment activities were legal, but the court ruled that she had committed fraud and sentenced her to death for the large amount of money involved. Unlike the MF Global fiasco in the U.S., financial crimes in China carry heavy punishments.

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The Chinese demand for gold still remains strong. According to GoldCore, China imported 40,000 kilos of gold bullion from Hong Kong in February, compared to only 3,115 kilos in the same month a year earlier. GoldCore explains, “Shipments were 72,617 kilograms in the first two months, compared with 10,564 kilograms a year ago or nearly a seven fold increase from the record levels seen last year. China’s appetite for gold remains strong and Chinese demand alone is likely to put a floor under the gold market.” The firm goes on to say that Chinese consumer demand for gold beat India for the first time in nearly three years in the fourth quarter and may surpass India as the largest gold buyer on an annual basis this year.

While well-known American investors such as Warren Buffett view gold as a “lifeless” asset, countries such as India view the precious metal as a way of life. Indian retailers went on a 20 day strike due to the government declaring in March that it would double import taxes on gold and place excise taxes on most gold jewelry. The new excise tax would also cause more regulation and red tape on jewelers. The new taxes caused an up roar and gold imports declined more than 50 percent. However, India’s gold-jewelry trade associations recently agreed to end the strike after Finance Minister Pranab Mukherjee promised to reconsider the new taxes. Prithviraj Kothari, president of the Bombay Bullion Association said, “All shops have reopened. Gold demand should pick up. In April and May total, imports will be around 100 tons,” according to WSJ. Gold is India’s second largest import item by value after crude oil.

Although it can be easy to be caught up in risk on risk off trading mentalities in gold, investors should bare in mind that gold is the unofficial world reserve currency and represents deep cultural beliefs in countries such as China and India. In addition to deteriorating financial conditions, these cultural beliefs and strong demand will continue to support gold prices in the years ahead.

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Disclosure: Long EXK, AG, HL, PHYS