-- Posted Wednesday, 4 December 2013 | | Disqus
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
I recently returned from India, a nation where an incredible 600 million people are under the age of 25. That’s nearly double the entire population of the U.S.!
What’s amazing about that figure is that, unlike the 1970s when India had no global footprint, today’s generation is increasingly gaining access to the Internet.
Social networking platforms are seeing an incredible growth trajectory in India, as one of the fastest growing markets. In fact, by 2016, the country is set to be Facebook’s largest population in the world, according to the BBC.
While Forbes India reports that there are only 137 million users in India, with the growing population and rising wealth, we expect this number to grow substantially.
I believe this connectivity changes the growth pattern for commodities. Like I told Kitco’s Daniela Cambone at the Metals & Minerals Investment Conference in San Francisco, this population carries on its love of gold. Mineweb reports that about 1 million couples will marry this wedding season, with around 33,000 weddings taking place on November 19 alone.
Gold traditionally accompanies these events, and a typical gift is “a pendant, earrings or a ring, weighing 5-10 grams depending on financial circumstances. Parents of the bride generally give heavier items like a necklace or bangles weighing 50 grams or more,” according to Mineweb.
Still, to help manage expectations, investors should anticipate a short-term headwind for the precious metal as India’s GDP per capita has stalled. The World Bank estimated India to grow 6.1 percent this year, but lowered its forecast to 4.7 percent due to a slowdown in manufacturing and investment.
The long-term picture looks positive though. While India grew at 4.8 percent in the third quarter, the finance ministry is confident the country can return to its “high-growth plan.” It projects the economy to pick up, accelerating to around 6 percent in the next fiscal year and about 8 percent in another two years, says The Wall Street Journal.
India’s growing GDP is very important to gold’s rise, especially when it comes to the Love Trade, where about 50 percent of the world’s population buys gold out of love. The math shows that an increasing GDP per capita in this part of the world has historically been linked to the rising price of gold.
Related to the Fear Trade—buyers holding the metal out of fear of poor government policies—gold has recently become less attractive due to the slightly positive real interest rates in the U.S.
As we explain in our Special Gold Report on the Fear Trade, one of its strongest drivers is real interest rates, which is when the inflationary rate of return is greater than the current interest rate.
Our model tells us that a real interest rate of more than 2 percent is typically bearish for gold.
Still, the real rate is not very close to the 2-percent tipping point. As of the end of November, the 5-year Treasury yield is 1.31 percent while inflation is at 1 percent. Investors end up with a slightly positive return of 0.31 percent.
With onerous regulations continuing to slow down the flow of money, I believe the government will need to keep its printing presses warm, eventually reigniting the Fear Trade.
