Record High Gold Prices on Rupee Bashing Triggers Physical Selling

Western powers told the Syrian opposition to expect a strike against President Bashar al-Assad’s forces within days, according to sources who attended a meeting between envoys and the Syrian National Coalition in Istanbul. The possibility of Western military action in Syria hit shares worldwide yesterday, while boosting demand for safe-haven assets such as the yen, gold and silver, while also helping oil prices rise sharply. Gold prices in India surged sharply to hit a new record high with MCX gold futures for October delivery on the Multi Commodity Exchange trading at rupees 34,725 per 10 grams Wednesday as the rupee again slumped to a new record by over 5% to 69.80(Sep futures) per U.S. dollar. MCX Silver for Sep delivery shot up to 59,580 rupees at the time of writing. Gold prices in India are at over 98,440 rupees per ounce, on Wednesday, and past the earlier record rupee high of 97,129/oz seen on November 26, 2012.

Nymex gold futures on Tuesday reached as high as $1,424 an ounce. While Comex gold futures are up by just over $250 at $1433, from the lows of $1182 seen in June, gold prices on the MCX in India are up by 9,525 rupees at 34,725 per 10 grams (a price equivalent to over $2000) from a low of 25,200 rupees in June. This massive rise in gold prices has been triggered in Indian markets solely on the back of the incessant rupee bashing. Gross domestic product that expanded at the slowest pace in a decade, inflation that’s among the fastest in the world and an unprecedented current-account deficit have created an economic trilemma for India which has prompted global funds to pull some $10.1 billion from the country since May 21. The passing of a landmark food program bill couldn’t have come at more inappropriate time,

Indian bullion markets see heavy gold selling:
Most traders and investors in gold have turned towards the bullion markets to either sell their gold bullion, coins or jewelry and book profits after gold prices hit an all time new record, or to pawn gold to pay for margin calls on their leveraged rupee (currency) or stock market positions. Traders and investors are reported to have lost heavily after getting caught on the wrong side of the already battered rupee. The rupee collapse also had a cascading effect on the Indian stock markets, where traders and investors had been bottom fishing ever since the Nifty hit a low of 5500. The NSE Nifty Index hit a low of 5108 today. Traders rushed to sell gold and cash in on the huge gains, but most of these seem to have been triggered due to large and urgent margin calls to maintain trade positions incurring hefty losses.

Globally, gold prices climbed to a three-month high in London, heading for a bull market, as speculation about an attack against Syria within days spurred demand for precious metals as a haven. Silver rose to four-month high. Assets in the SPDR Gold Trust reached the highest since Aug. 1, gaining 0.1% to 921.03 metric tons, according to the fund’s website. Holdings rose for a second week in the five days to Aug. 23.

Incessant Rupee bashing intensifies as markets hit super panic button:
Emerging market currencies such as the Turkish lira and the Indian rupee bore the brunt of the capital flight as doubts over the Syrian situation added to pressure from investors’ positioning for an end to the supply of cheap dollars from the US Federal Reserve’s monetary stimulus.

It is just impossible to put any realistic value to the rupee any more. The rupee plummeted the most in two decades to a record as a surge in oil prices, based on the imminent possibility of a U.S.-led strike on Syria, threatened to worsen the current account and push the economy toward its biggest crisis since 1991. Stocks and bonds plunged further. The U.S., France and the U.K. are considering limited military action against Syria after concluding the regime used chemical weapons against civilians, fanning concern unrest will disrupt Middle East oil supplies. This tension has worsened the rupee rout that’s seen global funds pull $8.7 billion from local debt since end-May on bets the Federal Reserve will pare stimulus. An 8.9% jump in Brent crude this month is set to boost costs for India, which imports almost 80% of its oil consumption. The rupee has lost 13.1% this quarter and 19.5% this year to date, headed for the worst annual loss since a balance of payments crisis in 1991 forced the nation to pawn gold to pay for imports. The collapsing rupee pushes up prices of goods, adding to inflation on top of meager urban salary hikes and an economy growing at its slowest in a decade. Indian economy will be witnessing a tighter slowdown when only recently in the past one quarter has it been so pronounced.

India’s budget and current account deficits are responsible for the rupee’s slide. The Indian government on Tuesday, passed a landmark bill through the lower house of parliament yesterday that expands the world’s biggest food program, which involves spending about 1.25 trillion rupees ($18.3 billion) in subsidies each year, potentially worsening the fiscal gap. India’s petroleum imports averaged $14.2 billion in the first seven months, compared with $13.9 billion a year earlier. Indian stocks may fall further as the nation’s external deficits and the capital flight from emerging markets threatens the currencies of developing nations, according to Goldman Sachs Group Inc.

Foreign investors sold nearly $1 billion of Indian shares in the eight sessions through Tuesday – a worrisome prospect given stocks had been the country’s one sturdy source of capital inflows, although net purchases so far this year still total $12 billion. The rupee has failed to rebound despite a slew of measures by policymakers, including extraordinary measures by the Reserve Bank of India to drain liquidity unveiled last month and action to curb gold imports and cut on India’s oil import bill. In bond markets, foreign investors have sold more heavily, with outflows reaching $4.5 billion so far this year. In its latest initiative, the government late on Tuesday proposed setting up a task force to look into currency swap agreements, a measure analysts said could bring some relief if carried out in time by reducing market demand for dollars or other major currencies.

As per Economywatch –

India on Tuesday approved 36 infrastructure projects, including 18 power projects, worth some $28 billion in a bid to jumpstart the economy and restore investor confidence after the rupee. On Tuesday, Chidambaram said that the rupee had “overshot its true level”, and stressed that the food security bill would not lead to the government overshooting its fiscal deficit target. “As I said in parliament, every emerging market is challenged today. So, India is also challenged, and the impact is felt both on the equity market as well as the currency market,” he said. “I think we’ll simply have to be patient, be firm, do whatever is required to be done, and the rupee will find its appropriate level. What I said a few days ago, I still maintain it. The rupee has overshot its true level, it’s undervalued. Others have confirmed it. And we have to be patient and we have to be firm and we have to do what requires to be done.”

“The message that we are sending is that the investment cycle has restarted, and we are pushing it. It is gathering pace and bottlenecks are being cleared” Finance Minister P. Chidambaram told a news conference yesterday. He said a cabinet panel had cleared 18 power projects, alone worth 830 billion rupees, reported Reuters. ”It’s not out of choice, but out of compulsion that the finance minister is announcing so many things,” said G. Chokkalingam, managing director and chief investment officer of Centrum Wealth Management in Mumbai. “The trinity of the fiscal deficit, slowing growth and an unstable currency is hitting us badly. In addition to these, the government has passed the food security bill which may put fear in the mind of rating agencies.”

The Hindu Businessline reported-
The Rupee will remain bearish till world markets come to terms with the emerging post – QE era. The rupee continues to be vulnerable despite Government and central bank efforts to rein in the depreciation. Efforts have been made to attract FDI, boost infrastructure spending, ease ECB norms, control investments abroad and reduce gold imports in order to contain the high CAD (current account deficit) — and, in turn, curb sharp depreciation in the currency. If we divide the factors that are impacting the rupee into domestic and international, we can figure out that while international economic issues are a matter of concern, it is the domestic economic weakness that is contributing to its ongoing depreciation — despite several efforts to deal with these infirmities.

The ratio of total external transactions (on current and capital account) to GDP indicates the level of financial integration. In the case of India this ratio had more than doubled from just 44 per cent in 1998-99 to 112 per cent in 2008-09, thus suggesting that the Indian economy was well integrated financially with the rest of the world. Financial integration is a stronger force today than ever before. Hence, the fear of a pullback in quantitative easing (QE) by the Federal Reserve has already led to capital outflows from India and other major emerging economies.

While gold prices on the Comex are expected to rise exponentially due to several factors, I doubt if the same would be true now for gold in the Indian markets as the rupee bounce is imminent after serious and incessant bashing. And if that is true, the rupee should rise against the dollar, in turn weakening gold prices in Indian markets.