Fall in Gold Prices V/s. Union Elections? – An Indian Perspective.

June 23, 2013

Fall in Gold Prices V/s. Union Elections? – An Indian Perspective.

Greetings from Hitesh! There are many theories of Gold prices coming down….most of the guys in Media are busy talking about FED winding up QE, American economy getting stronger, EU countries selling gold and many such reasons are being put forward. I have tried to look from Indian Perspective.

Let us go back to 2009:- 

“The 2009 agreement between Zurich-based UBS and U.S. and Swiss officials called for the bank to turn over names and account details for 4,450 American UBS clients. In recent years, the Department of Justice Tax Division and the Internal Revenue Service have stepped up its efforts to find and prosecute offshore tax evasion. The U.S. had hoped to obtain the information from UBS to for use in prosecuting tax dodgers.”(you can read full post http://www.mainjustice.com/tag/swiss-bank-accounts).

Indian Accounts:-

It is well known fact that top Indians are/were also having accounts (refer to wikileaks) and Swiss banks were forced to publish their names also. The heat to publish became more severe during 2009 as US became successful in getting the details.

Legally, you can know the account holders name and the amount in each of the account. However, if the same money is converted into GOLD and kept in Lockers….it is not possible to know what lies inside the lockers!!

How The Game Changed?

Money in Swiss Bank account got converted into Gold and kept in Lockers around 2008 & 2009. In 2008-2009, Gold was around USD 900 per OZ. USD was Rs.45. (approximate average rate). Incidentally, USD went from Rs.40 in early 2008 to Rs.50 by march 2009….meaning somebody was buying Gold !!

Preparation for Election:-

India is slated to go for Union Election in late 2013 or early 2014. It is also an open secret that you need money to fight the election. The major source of Cash Money has always been Real Estate / Gold and Corporate Donations.  With Real Estates in Slump, Corporates are facing severe Liquidity crunch, the only solid remaining source is GOLD.

How the plan could have been executed?

Around USD 1700, the gold was sold (Along with European banks) and converted into USD. Gold was sold….so the prices went down and USD was bought….so the USD value went up.

Now the same USD will be converted into Indian Rupee before Union Elections. If the USD goes up in value, the converter will get more Indian Rupee. So, we had said that we will not be surprised to see USD at Rs.62 to Rs.65 till the elections are over.

How you are deprived from Investing in Gold?

In India you are paying 8% import duty, 1% vat and the seller also should earn minimum 2%. If you total all, you are paying 11% more plus the USD rates of the day. Now let us see the calculation for 10 gms.

Suppose today’s USD price is 1300 for 1 troy ounce( 31.10 gms). Add 11% to it. So, the total price will be USD 1443. At the current rate of USD at Rs.59, you are paying approx Rs.27400 for 10 gms. Had the USD been steady at Rs.50, you would have got the same gold at Rs.23200. So, you are paying Rs.4000 extra for buying gold. If the duty is also brought back to 4%....you will get gold around Rs.22300. So, you will save more Rs.5000 over current price of Rs.27400!!

But by keeping high duty structure and high USD, you are deprived from buying gold at lower prices. The major reason published in support of high duty is GOLD import increases Current account deficit. Let us see how correct it is?

Classification of Gold:-

To charge high Import duty….they have classified gold in Current account……Gold is the lender of the last resort….in 1991, only gold had helped India to save the face….why it should not be considered in Capital Account? A typical Indian will sell Gold when all his resources are utilized. It is a capital for him. If we remove the gold from Current account…..our deficit will be reduced drastically, our ratings will improve to more solid.

India is importing 800 tons of gold each year…..and if it is added to capital (Where it must be shown) ….how strong our balance sheet will be? But to take us for a ride…..they are not ready to change the classification.

My Personal Call:-

We see value of USD against INR coming down to more stable levels by the time elections are over.….also we will have more visibility in International markets by that time. Once both these happens…..you may see stability in gold prices.

We maintain cherry picking in Equities. Buy when others are selling…..you will bless us.

What Next?

If you need help in finding out the investment opportunities, do approach us.

You can follow me @hiteshmparikh on twitter.

Live With Passion…Invest With Passion.

Hitesh Parikh.