Gold Premiums In India Are Doing Something Very Strange…And Investors Need To Pay Close Attention

Summary

Indian gold premiums have been falling over the past few weeks -- and that is very different than what we would have expected.

We think now the moves in the Indian gold market have been related to Indians raising liquidity.

Recent rises over the past few days in the Indian gold premiums suggest the initial liquidity raising is over and now normalcy is returning to the gold market.

Over the past week something very interesting has been happening in the Indian gold market as evidenced by the moves in the premiums. The Indian market is critical to physical gold demand as the population buys more gold per capita than any other country in the world, and without Indian physical demand it is hard to be bullish on physical gold demand.

Additionally, what has been going on in the Indian gold market has been counter-intuitive to what we would have expected - thus we need to pay particular attention and understand the "whys" to understand where that market (and probably the physical gold market in general) is headed.

So let us take a look to what is going on in India…

Indian Gold Premiums

In a surprise announcement, a few weeks ago, Prime Minister Narendra Modi - supposedly seeking to curb counterfeiting, flush out tax-evading tycoons and uncover bribes stored in cash-voided the highest-value currency (500 rupee and 1,000 rupee bills, worth about $7.50 and $15, respectively), requiring them to be turned in for new notes by Dec. 30. The result has been a cash crunch just ahead of the gold's peak demand time, the wedding season, which this year runs from Nov. 20 to Dec. 14.

There's plenty of articles that detail the move and the consequences, which we will not go into now. But when we combine that uncertainty (and desired money-laundering attempts), with the fact that gold has dropped $100 over the past few weeks, we would have expected Indian gold premiums to surge.

They have not.