Indians Buy Gold Before Wedding Season
The gold buying that happens before wedding season in India is always a major driver of the market; this year India has a stock market that rose 30% in 2014 and an end to import restrictions, which means Indians are in a shopping mood.
By Vikram Rangala
Monday, February 23, 2015 - 00:00
The cultural importance of gold in India is hard to measure. The Kolar gold fields in the south, near Bangalore, have been mined for at least 5,000 years. Artifacts from the Indus Valley civilization and Mesopotamia trace back to Kolar ore.
Despite their head start in mining, India became a net importer of gold even during Roman times, mainly because it also had the one commodity that was, particularly to Westerners, more precious even than gold: spices. Pepper, cardamom, cinnamon, and other spices drew Arabs, Romans, Chinese, and later the Portuguese.
When Atilla the Hun attacked Rome, he threatened to sack the city unless they paid his ransom, not just in gold, but in casks of pepper from India. The defeat left the Romans shocked and eating bland Caesar salads for months. The trade of spices for gold continued for the next millennium.
The world’s largest gold buyer
India is still the world’s largest importer of gold, accounting for 25% of global demand, greater than that of China (except in 2014). With both a growing middle class eager to show off their new wealth and a rural population that still keeps its savings in the form of gold, India looks poised for major buying this year.
One place Indians like to show off is in weddings, which last a minimum of three days and feature a bride covered in as much gold as the family can afford and exchanges of jewelry as gifts. Indian weddings are the one great chance to create a bit of heaven on earth for family and friends, so it’s no wonder it is both a cultural and economic force.
Import restrictions removed
Two events of the past year stand to make Indian demand for gold an even more potent force than usual. First, the Bombay Sensex stock exchange in 2014 rose nearly 30%, become the highest-valued stock exchange in Asia. Add that to a steadily growing economy and, at least on paper, the wealthy in India are wealthier than ever.
Second, late in 2014, the Indian government removed its long-time limits on gold imports, clearing a major hurdle to trading and buying gold at world market rates. Indian smugglers had been going to great and sometimes comical lengths to bring gold into the country, mixed with coffee grounds, hidden in turbans and other clothing, stashed in phones and body cavities. The changes in the law make gold-smuggling a less lucrative occupation. You can just bring it in now.
A final factor that can’t be overlooked is cheap oil. India not only imports most of its gold, but also 75% of its oil. The cheaper gas, diesel, and kerosene prices amount to, for many average Indians, as much in extra spending power as a second cut in import duties.
Bearish factors as well
While a newly-unleashed demand for gold by a newly-enriched population of a few hundred million people might seem like the perfect storm for another rise in gold prices, traders shouldn't be too quick to just blindly buy gold.
First of all, there is a lot of gold supply in the world. Second, gold prices face several bearish factors. The strong dollar and renewed stock market boom make it less attractive as a flight-to-quality reserve. While the Fed has remained cautious about raising interest rates, whenever it does so, the higher borrowing costs will make gold even less attractive.
With multiple factors affecting this commodity, traders will be looking for ways to participate in the market while limiting their risk exposure. Compared to the usual ways of trading gold, such as ETFs or futures, Nadex binary options offer a limited-risk way to test your ideas in the market, whether intraday or over the course of a week. Because they are short-term instruments, Nadex binaries can allow you to move with the short-term fluctuations, rather than holding a position through large drawdowns.
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