Physical Demand in India
Physical demand in the large consumer gold market of India has been weaker than expected because the newly elected government has not yet reduced gold import restrictions despite the trade balance having improved.
Last year, the fall in world gold prices saw a surge in gold imports into India which had a large negative impact on the trade balance and weakened the Indian Rupee. Import duties on gold rose to 10% and import restrictions were imposed specifying that of all the gold officially imported, 20% had to be re-exported. Other import restrictions were also introduced for banks and trade houses that usually import gold.
These restrictions on gold demand worked as expected however they led to a sharp increase in gold smuggling into India. Although official figures on gold smuggling are just estimates, the World Gold Council speculates that for all of 2014, Indian gold imports via smuggling could reach 200 tonnes. This is about the same amount as was imported into India officially during Q2 of this year.
It remains to be seen how the new Indian government views the current import restrictions on gold. They may wait in the near term before tweaking with economic policy that has helped to improve the trade balance.
The Indian festival and wedding season is fast approaching however, which is always seen as a positive factor in the annual cycle of Indian gold demand. The major festival of Diwali is on October 23, while the end of year wedding season peaks in November and December.
The wedding season is important since in traditional Indian society, gold is given as wedding gifts as well as being a source of demand for wedding jewellery.
Another factor impacting gold demand in India is the monsoon season since this affects crop production and dictates how much disposable income is available to rural Indian society to save in the form of gold. If a monsoon season is weak then sometimes saved gold is even used to raise cash to balance household incomes.
Technical Factors Support that had existed at $1,270 has now been breached. The next major support level is at $1,240, but before that the psychological support level of $1,250. There is major support near $1,180.
Resistance is now at $1,277 and $1,297. If gold did manage to go above $1,297 it could trade up to $1,325 or even higher to $1,345. A resumption of an uptrend in the price would be clear if gold broke above $1,520.
Interesting, Jim Sinclair, the well-respected gold expert and technical analyst said yesterday that gold cycles which turned gold back from the $1,900 level in 2011, have now turned up and are indicating that the gold price which is now in a major support area, will now aim to reach a $2,100 target area.