Gold Trade: Why high demand for gold may be a good thing for India

Much of the recent attention regarding gold trade has been directed at China. This is entirely justified; rapid gold purchases from around the globe have fomented speculation that China is preparing to float its currency. But the truth is no-one really knows what they are planning to do. Their strategy is a manifestation of Deng Xiaoping’s famous maxim “hide your brightness, bide your time”. In other words, they will not show their strength until they can ensure they will achieve their objective.

Ambiguity and speculation over what is, undoubtedly, a very important question for global markets has meant that gold trade in other, highly significant, consumer nations has slipped under the radar. India, for example, currently ranks top in terms of largest gold consumer nations and in the past few years there have been shifts in policy.

Gold is an extremely popular commodity in India; it is as much a symbol of affluence as it is a means of providing future security. Demand for the precious metal has remained high. However, in recent years, India has struggled to balance this demand with its large trade deficit.

Policy makers were so concerned with the overall trade imbalance that in August 2013 the so-called 80/20 rule was imposed. This rule restricted India’s gold imports and forced 20% of any gold shipment to be re-exported by Indian jewellers. The 80/20 rule was scrapped in November 2014 after it became apparent that the domestic jewellery sector was suffering (Figure 1). Policymakers within India instead decided to focus on boosting exports rather than curbing gold imports.


Figure 1  | India gold jewellery market, 2008 – 2015, the impact of the 80/20 rule
Source | DeltaMetrics 2015


This is potentially a very shrewd shift in strategy; Delta Economics does not expect India’s demand for gold to abate with a forecast compound annual growth of 9.5% to 2020. Therefore, instead of cutting gold imports, which was leading to an increase in smuggling, February 2015’s budget suggested a scheme to monetise Indian citizen’s private gold holdings: an estimated 20,000 tonnes. The scheme would allow Indian citizens to accrue interest on any gold deposited into the banks. This could, as a consequence, reduce volatility in the rupee and provide the average Indian household with extra spending power.

At a time when the world’s national banks seem to be realising the potential of having a gold-backed currency, India’s historically high demand for gold suddenly doesn’t seem like such a bad thing.


Gold Trade: Why high demand for gold may be a good thing for India  |  Author  |  Jack Harding  |  Analyst and Publications Manager

Asset of the month: Crude numbers

Why oil prices may well be on the rise in March |  The Delta Economics asset price forecasting model is calling oil long this month reversing the extensive fall in oil prices. The Information Ratio, which measures the performance of our index each month against benchmark returns, is at 0.79 for March’s oil call. Any Information Ratio value above 0.5 suggests strong back-tested performance.

There are two reasons for being bullish about oil. First, March of any year usually sees a seasonal pick-up in trade following Chinese New Year. Trade and oil prices are highly correlated (0.94) and move in the same direction: if oil prices rise, then trade usually rises too. This usually reflects an increase in demand for that month (Figure 1).




Figure 1  |  Monthly value of world trade (USDbn) versus WTI Oil, Last Price Monthly, June 2001-December 2015 (forecast)
Source  |  DeltaMetrics 2015, Bloomberg


Second, Saudi Arabia has increased crude oil prices for April’s sales to Asia. This is bound to put upward pressure on prices in March more generally. Not least because it hints that Asia’s economy may well be turning a corner. The correlation between Chinese trade and oil prices is very high at 0.89. Chinese trade similarly dips at the beginning of the year but Delta Economics sees a rapid pick-up during March with overall growth in Chinese trade for 2015 looking positive at over 7%.




Figure 2  |  Monthly Value of Chinese trade (USDbn) versus WTI oil Last Price Monthly, June 2001-December 2015 (forecast)
Source  |  DeltaMetrics 2015, Bloomberg


The pick-up in demand at the end of Q1 is quite marked. The forecast for oil during 2015 is for a rise in oil prices alongside a modest increase in the rate at which world trade is growing – from 1.2% in 2014 to 1.9% in 2015. However, this does not herald a return during the year to values above $100 a barrel. The modest growth in trade we are forecasting for the year is substantially slower than the post-2008 oil price trough and, as this suggests that global demand remains slack, the crude numbers do not suggest rapid increases in oil prices during the year.


Asset of the month: Crude numbers  |  Author  |  Rebecca Harding  |  CEO

Demanding times

Why Europe urgently needs to focus on long term competitiveness  |  The Eurozone has a problem, but not the one that policy makers thinks it has. On the face of it, prices falling by 0.1% between October and November, growth at 0.2% in Q3 and unemployment at 11.5% is quite enough to concentrate minds as ECB policy makers sit down at their next meeting on the 4th December. The ECB is coming under increased pressure to stimulate demand across the Eurozone in order to stave off disinflationary pressures that may result in deflation and hence raise the spectre of the Eurozone becoming like Japan: negative price increases alongside near-to-zero growth.

But the problem is not disinflation, nor even deflation as such. It is long term competitiveness and the policy paradoxes that have taken the Eurozone, and, indeed the whole world to the brink of a low inflation, low growth normality as oil prices continue to tumble.

Within Europe the problem is not the willingness to boost investment through Quantitative Easing (QE) and low interest rates. The ECB is already committed to sovereign Bond purchases for peripheral nations if those nations commit to structural reform, which, while contested by Germany and its Constitutional Court, represents a statement of intent. Alongside the promise for corporate bond and asset backed security purchases, the ECB is clearly in the market for some form of QE alongside negative interest rates if necessary.

The policy paradox is this: the solutions that are currently under discussion are aimed at the monetary side of the Eurozone economy while having the effect of contracting the real, demand, side of the economy. By definition, monetary instruments are being used to shore up the banking sector, to inject financial stability into the system and to reflate the economy by increasing the money supply. The hope is that by creating a financially stable system, credit conditions will loosen and, alongside structural reforms and austerity at a national level, will naturally generate growth over the long –term. But the austerity packages and national structural reforms alongside this flatten demand and therefore the capacity for the policies to work over the long term.

One measure of just how flat demand and of how important the drive for greater competitiveness should be is trade. The picture for Europe does not look good: the value of European exports is forecast to decline outside of the EU by 0.5% in 2015 which is a long way from the robust export-led growth that the region needs. Within European EU28 trade is forecast to decline by 3.5% and Eurozone trade by 3.7% over the next year, as shown in Figure 1 which illustrates imports trade within Europe and into Europe from non-EU countries.



Figure 1  |  Monthly value of intra and extra EU and Eurozone imports (USDbn)
Source  |  DeltaMetrics 2014


Imports from outside of the EU are forecast to drop by 1.45%. Much of the drop in imports from non-EU countries has to do with the falling oil prices (Figure 2). 7 out of the top 10 oil importers into Europe are not in the EU28 and as 30% of the EU’s imports in value terms are oil and gas, the link between falling import values and the reduction in oil prices is clear. There is a 94% correlation between EU imports from non-EU countries and the oil price: the flat trade forecast for 2015 therefore, suggests that there may be some small upward correction in oil prices but nothing substantial until the end of Q1.



Figure 2  |  Monthly value of EU imports from non-EU countries, June 2001-Dec 2015 (USDbn) vs NYSE Arca Oil Spot, Last Price Monthly, June 2001-Nov 2014
Source  |  DeltaMetrics 2014, Bloomberg


In theory, this helps the EU and the Eurozone because it reduces producer costs and, hence, arguably prices as well. Disinflation, which is simply falling prices, is catalysed by lower oil prices but does not in itself represent anything negative.

Of more concern is the forecast drop in intra regional trade between EU28 and Eurozone countries, which is forecast to fall by 3.5% and 3.7% respectively. Much of this trade is dominated by high-end manufactured goods, for example, automotives, consumer electronics, pharmaceuticals and machinery. If demand for these products is falling (Figure 3) then it suggests a deeper malaise within the system that is triggered by disinflation but leads ultimately to lower demand.



Figure 3  |  Europe’s demand problem
Source  |  DeltaMetrics 2014


Europe clearly has a problem: it’s demand for the higher end products that have defined its consumption patterns in the past is falling: demand for cars will fall by around 5% in 2015 and demand for medicines by 2.4% and 0.6% respectively. This matters for the world because, if demand is falling, then Europe has the potential to transmit its lower demand through the trade system to the rest of the world since it accounts for 44% of medicines, 34% of cars and 26% of computer imports across the world.

So if Europe is demanding less, then, accordingly, other countries will see their aggregate demand affected by the drop in trade to Europe as net exports drag further on global GDP. This is reflected in the forecast for European car and medicines exports, both top ten trade sectors for the world, which are set to fall by around 1% in 2015. As EU produced Pharmaceuticals account for 64% of all world exports, and cars for 50%, this suggests a tough year ahead.

All is not lost and the highest end, research-led exports from Europe, aircraft and biopharmaceuticals are set to grow significantly. In other words, the challenge for European policy makers is to ensure that Europe remains competitive at the highest end of the manufacturing supply chain where it already dominates global exports.

It is unlikely that the ECB will consider QE on Thursday and most economists expect any European QE to happen in Q1 2015 at the earliest. Delta Economics is of the view that European long term competitiveness is now a more pressing issue than addressing issues of disinflation. A substantial boost to European and domestic infrastructures, particularly to support high end manufacturing industry, is a necessary counterpart to any austerity measures to bring wayward budgets under control. Any QE at any point will be potentially necessary to stabilise international markets but not sufficient to fuel long term growth.

Webcast 016 | Whisky and aspirin: is this the future of Europe?

In light of Delta Economics negative forecast for European growth, CEO Rebecca Harding and OMFIF Founder David Marsh explore the reasons behind the slowing in trade and how it is affected by, amongst other things, the recent slowing in Asian markets and uncompetitiveness. The discussion also examines the internal imbalances in the European economy, with particular emphasis on Germany and also looks at some of the fundamental differences between countries such as Greece and Spain with a view to understanding differences in trade growth patterns. This webcast also discusses the relatively positive trade growth in European periphery economies as well as they challenges they will face in the short and longer term.


Webcast 016 Author  |  Rebecca Harding  |  CEO

Webcast 012 | Is Mexico the new China?

Rebecca Harding presents Carlos Sanchez Pavan and Shannon Manders to uncover the key trade drivers behind Mexico€™s strengthening supply chains. Mexico has been a strong beneficiary of re-shoring in manufacturing and the country’s strong economic and political structural changes have facilitated trade growth in automobiles, auto parts, oil and alternative energies. Delta Economics’ view is that Mexico and increasingly, the Latin American region, have growing competitive advantages over emerging markets in Asia and that China is becoming less competitive in wage and productivity terms, relative to Mexico.


Webcast 012 Author  |  Rebecca Harding  |  CEO