Yesterday, The Reserve Bank of India (RBI) cut its repo rate (the level at which the central bank lends to commercial banks) by 50 basis points from 7.25% to 6.75% with the market having priced in only a 25 basis point drop. Only 2% of forecasters predicted a cut of this size which represents the biggest drop since 2009 and as such lends support to our recent observations of repeated GFC record reads occurring for numerous metrics in recent weeks. Yesterday’s cut follows cuts in January, February and June that had already amounted to a 75 basis point drop. In what could have been mistaken for the content of an RBA announcement, Governor Raghuram Rajan said “The weakening of global activity since our last review suggests that commodity prices will remain contained for a while” and indicated that "Monetary policy has to be accommodative to the extent possible". These statements represent somewhat of a policy divergence from those represented by the hawkish faction within the Federal Reserve. One can understand the importance of currency competitiveness given the fact that India’s exports have seen 8 consecutive months of decline with the July merchandise export figure falling by 10.3%yoy. The April-June quarter of this year saw Indian exports fall by 17%yoy which represents one of the steepest declines on record. The depressed oil price will have had an influence here with oil contributing 18% of India’s total exports. See the extent of India’s export problems in the chart below from Deutsche Bank. The RBI’s oil price projections have been subdued from the April range of $60-$63 down to $50/barrel currently. In an all too familiar story, growth concerns seem to have heavily influenced the rate cut with India’s print falling from 7.5% to 7% in the April–June quarter. With a central bank target of 6% for 2016, India’s consumer inflation is also well below expectations. At the announcement of the rate cut, Indian shares arrested their 1% falls for the day and closed flat. In last Friday’s weekly wrap we referenced ANZ research predicting that the RBA will need to cut our official cash rate to a record-low 1.5% next year and the RBI cut yesterday is likely to reinforce that analysis. Whilst on the topic of India, let’s look at their August gold imports which jumped to 138 tonnes. At 5% of total annual gold production, this represents the highest monthly figure for this year and has been topped only once since 2013 as pictured below. What’s interesting about this spike in Indian gold demand is that it is occurring within the context of a particularly week monsoon season which has the effect of reducing rural incomes. Note that the monsoon deficiency was reference in the RBI’s statement of yesterday in the context of food inflation pressures. A good analysis of this activity in gold was made recently by Hebba Investments who stated that “investors need to remember that much of Indian physical gold demand is coming from the rural economy which holds gold in lieu of rupees and bank accounts. So the fact that gold demand is surging in this sector despite lower incomes suggests that for the average Indian gold buyer, the price of gold is simply too low to resist.”
A good look at India, thanks. But India's different, in two ways. First, there's an ever-increasing horde of Indians to divide the pie, and second, the rupee began to plummet long before the unfavorable trends of the past year or two. And with one of the most dangerous of potential warfares in the world, India vs. Pakistan, the odds of a mis-step are high. Now multiply India's ills by several dozen more shaky nations (although few at risk of mass starvation), and you have the current state of world affairs, and plenty of fuel for the negative commentators.
I don't think the rate change will have near the significance as the highly possible El Nino 2015 on SE Asia and India's food production. I do not believe that a total effect has been hypothesized on the supply/demand of food and production that a drought as large as the one in India during the last large El Nino can bring. Then the necessity of selling ( not buying) pm to survive will become a possible reality. A large number of people seem to feel that this years possible El Nino is just a one time near event since before they have been wide spaced multiple years, but the world has changed, weatherwise. I know that few here are paper traders, but some Forex contracts shorting the Rupee with a medium term expiration might be much better yielding ( leverage)than PM for a while, but wait until the weather starts to change. USD buys gold, silver or what ever, and if the Indians are selling for survival , the price will Not go up. IMO.
Interesting. While I believe that peasants and farmers have bought gold, I also believe the total quantity is so small (compared to purchases by the rich, banks, and corporations) that their desperation sales will be a non-event, if for no other reason than their sales are essentially a black-market deal, no tracking, no data, nothing for the tax-man. By the end of 2016, I predict famine in India (and Myanmar, and Viet Nam) that will set them back 20 years. China, of course, will exploit this situation in every way possible.
I would not underestimate the holdings of the rural poor of gold sir. They are heavy savers, and most is held in physical gold. Of the few I know, every family member holds a few ounces of gold at least. In Thailand, (similar culture regarding gold), I have met small farmers who can pull out 100 ounces if needed. However, this cuts both ways. Because they value holding their gold, they do not lightly sell, trying to do about anything else but sell their gold. So I believe you could POSSIBLY see massive selling if things got bad enough, most likely you will only see modest selling to get by. Its just a different culture. In the US you have tiny holding of gold for most people, (a few rings and necklaces, all watered down gold), for the vast majority of the population. Over there its the store of wealth for any money besides land, and is passed down through generations. Every single person, from a large corporation owner to a small town peasant, owns ounces upon ounces of high purity gold. You won't see it as an outsider, but my wife's cousin lives next door to one of our houses. Modest house, she a housewife he a worker. She pulled out her gold jewelry one day before going to a function with my wife and had maybe 18 ounces of high grade gold jewelry, and I don't think she was terribly unusual. This was on the outskirts of a Thai town, not Bangkok.
Now I am curious. How secure is the holding of land by the poor, in countries where the rule of law has been shaky for decades? Certainly the Japanese of World War II confiscated what they pleased, creating thousands of refugees with no recourse. So much the worse if you can't read and write. I never thought about land holding before. Take the concept to our European ancestors - when did the poor begin to own their land, as opposed to serfdom and/or renting from the crown or noble grantees or the Church? And how did they ever acquire enough funds to buy anything?
If the government tried to take farmland you would simply have 80% of the population rise up at once. Land rights for most of SE Asia are secure, (Vietnam and China being exceptions due to the "Communist Party"), though the rich usually get better access to government owned land. Land, along with gold, is about the only asset most people trust. As such, land is horribly overpriced versus rents. We might yield half of 1% return from our land versus its price. Since most do not trust the stock and bond markets there, (I don't blame them really, they are horribly manipulated like US stocks in the 1870's), the only place they are comfortable putting money is in land or gold, maybe their business. This, coupled with high savings rates, lead to a lot more assets than you may believe.
This is by no means a contradiction to your post, I just thought it was amusing -- how diligent the small entrepreneurs are, (Maeklong, Thailand). http://www.wimp.com/vegetablemarket/
And I bet you all of those ladies have a few baht of gold hidden away somewhere. No matter how poor they appear to you and I, most have some gold and if they get some more money in their pocket, will buy some more. Boy, I am sounding like a gold bug, aren't I? I am not, just for the record, just commenting on some of the demand for the metal, not necessarily saying if its a good investment or not. Cataclysmic damage, not just a light monsoon, very well could lead to a LOT of gold hitting the world market at once.
Interesting article a little different from the usual about this area. http://finance.yahoo.com/news/gold-discount-fourth-week-india-093959436.html
