Indian BSE Stock Market Crash and Lack of Gold Demand

Indians have not really become ‘anti-gold.' They are just undergoing a natural re-evaluation process. The global crisis makes the outcome rather predictable. It's lonely out in gold-land without Indians doing their traditional holiday buying. What's the deal? Why are they staying on the sidelines?

There are a number of reasons. Most of them have been touched on before, but the main reason is that urban Indians have recently emerged from the dark ages of superstitious adherence to rigid traditional values – and stepped right into the utter blackness wherein the modern banking caste thrives.

Bank-issued credit has helped India transform itself from a country without a middle class beset by city slums, poverty, cholera and famines into a modern-day miracle that in no way falls short of the Chinese miracle. Naturally, that is something to be proud of, and Indians rightfully are - so, just as naturally, they tend to go along with their newfound appreciation for western financial wizardry. Unsurprisingly, they have promptly expressed that appreciation by sinking a good part of wealth into it.

‘Sinking' is the operative term here, of course. Here is what happened to the Bombay Stock Exchange since December last year:

There is one more reason that has not been discussed much, but it is a direct corollary from the last sentence above. The Indian middle class that has squandered away its former gold wealth for an ephemeral illusion of even vaster future riches has gambled away its last undergarment and is now in no position to buy anywhere near the traditional amount of gold anymore. In good old western tradition, they lost their britches in the stock market. Now, they are reduced to bargain-hunters as they are only willing to re-enter the gold market at prices substantially below $800 per ounce.

India's BSE (Bombay Stock Exchange) has lost more than 50% of its December 2007 peak value. Gold (even its comedians exchange paper-contract variety) has only lost 20% in the same period. Now, all those illusory riches are gone, however, and the adverse wealth effect of standing naked in the cold winds of a global stock market rout is forcing Indians to conserve their resources, so they're just not buying much gold..

The question to answer is – how well are they conserving resources by staying in cash or money market funds, or whatever? How much better could they do by returning to the safety of gold? After all, gold is the only financial asset that is maximally insulated from the foibles of uninformed and corrupt policy makers.


India's inflation slowed more than economists expected to a four-month low, giving the central bank room to keep injecting cash into the financial system without fanning prices.


India's Inflation May Rise to 11.86%: Bloomberg Survey

Mind you, that the ‘four-month low' reported in the first article came in at 11.44 percent. That's not that far of a cry from the expected 11.86 percent. Mind you, also, that a 0.42% difference can easily be finagled in order to give the central bank the ‘reason' it needs for dropping its interest rate. Once you're talking about price-inflation in the double-digits, half of a single-point drop isn't exactly overwhelming – or even mildly encouraging.

With the economy of India's major trading partner, the US, about to be completely undermined and swallowed up by government largesse, and with the Europeans also not doing all that well on that front, who will farm out their personal services to (no longer all that low-priced) Indian virtual assistants?

One thing is certain: The latest drop of the derivative price-illusion we call ‘Comex-gold' into the sub-$800 region has proven that gold at or near $700 is viewed as a tremendous bargain, especially in India. This, combined with the stock-rout induced reluctance to buy at prices above $850 may well keep Comex gold in that tight range between these numbers for the near future.

However, when viewed in comparison with the fifty-plus percent losses of other asset classes, gold – even its third-cousin derivative variety traded on the New York Commodities Exchange – is proving, once again, that it is indeed the most reliable and therefore superior wealth storage facility man has ever known. In times like these, who could ask for more?
The Indian Price-Floor

The Indian market's $700/oz price floor under gold will keep it from following other asset classes into the abyss. Here is a picture:

Major stock markets worldwide have already tumbled over the fifty percent ledge and are about to resume their free fall. Many others will follow. I don't know about you, but the chance of buying into an asset that has already suffered most of its potential decline (Friday's Comex close for derivative gold came in at $782.90 for the 24hr contract) sound pretty good to me. That is especially true at a time when the world is holding its breath to await the Lehman implosion's second-round effects on the credit default-swaps market, when protection-sellers are forced to fork it over, this coming Tuesday.

Push the rewind button on this phenomenon a few more times while worldwide stock markets keep on tumbling and long-term interest rates keep heading the other way, and you can see why more and more people will come to the realization that, indeed, there is safety in ‘them thar hills' where gold can be found. All the while, credit markets are responding only in the most underwhelming fashion to hyper-billion dollar government bailouts.You know very well what happens when the credit doesn't flow in a credit-fueled global economy. It's the same thing that happens when gasoline doesn't flow through the carburetors of your car's engine: nothing.

That spreading perception of where true financial safety can be found will trickle down even into the nether reaches of the Valley of Comex where the derivatives-river of paper-gold flows like a non-potable, poisonous version of milk and honey. It has long been known that paper factories are some of the worst polluters of our waterways. It's the same with the Comex' manufactured stream of paper contracts. Soon enough, even fund managers will have to return to the valley to drink their fill of the poisonous mixture. What else can they load up on to reduce damage to their portfolios? Their funds' digestive tracts are not set up for physical intake. Meanwhile, physical gold owners (there are still many Indians among them) will safely look on from the hillsides as the polluted river below turns into a raging torrent.