Gold in Indian Rupees, the USD and the Many Non-USD Currencies / Commodities / Gold & Silver 2019
Westarted yesterday’s analysis with the investigation of the Euro Index and goldprice in this European currency. Today, we’ll take a moment to analyze the goldmarket from the Indian point of view. Gold has a special place in the Indianhistory and culture, India is the second biggest “consumer” of gold (rightafter China). USA’sgold consumption is third biggest in the world, but it’s less than one fourth of theIndian gold consumption. This means that to a considerable extent, the Indiangold buyers can influence gold’sfundamental situation.
Moreover,India is the second-largest English-speaking country (US comes in first with268 million English speakers, while about 125 million people speak English inIndia). Since we’re writing in English and about gold, it’s only natural todiscuss the Indian side of the goldmarket.And by that, we mean taking a closer look at gold’s price in the Indian rupee.
Inthe recent years the value of the Indian currency has declined compared to thevalue of the U.S. dollar, and so did gold. This mean that if you live in India,you have yet another reason to be holding gold and one less reason to worrythat gold is going to decline profoundly. Yet, the situation is not thatsimple. After all, the huge value increases in the USD Index translated intodeclines in gold that were even bigger. This means that from the non-USD pointof view, for instance from the Indian point of view, gold price still declined.Where does that lead us to?
Itleads us to checking what really happened with the price of gold in terms ofIndian rupees during two situations that appear most similar to the currentsituation with regard to the USD Index movement (the 80s and mid-90s). Inparticular, the less distant from these situations – the mid-90s – isoutstanding in terms of similarity, and looking at what happened to gold formthe Indian perspective at that time should give us invaluableinsight into what may be lurking just around the corner.
Firstthings first – why should you care about some two situations from a ratherdistant past? We wrote about it, but it was already some time ago, so it seemsappropriate to go over it once again.
Let’sstart with the fact that the USD Index is holding up extremely well. It’s notplunging and it’s moving in a rising trend channel despite Trump's – U.S. President’s – numerous calls forlower USD values, the major shift in Fed'spolicy (moving from monetary tightening to loosening). If it happens for a day, or aweek, or even a month, it could be accidental. But it’s been taking place formany months. And it’s not a coincidence either.
TheUSD Index is after an epic breakout and a huge verification thereof.
TheBig Picture View of the USD Index
The2014-2015 rally caused the USD Index to break above the decliningvery-long-term resistance line, which was verified as support threetimes. This is a textbook example of a breakout and we can't stressenough how important it is.
Themost notable verification was the final one that we saw in 2018. Since the 2018bottom, the USD Index is moving higher and the consolidation that it's been infor about a year now is just a pause after the very initial part of the likelymassive rally that's coming.
Ifeven the Fed and the U.S. President can't make the USD Index decline for long,just imagine how powerful the bulls really are here. The rally is likely to behuge and the short-term (here: several-month long) consolidation may already beover.
Thereare two cases on the above chart when the USD Index was just starting itsmassive rallies: in the early 1980s and in mid-90s. What happened in gold atthat time?
GoldPerformance When the USD Index Rises
Thesewere the starting points of gold's most important declines of the past decades. The second example is much more in tune with the current situation as that'swhen gold was after years of prolonged consolidation. The early 1980sbetter compare to what happened after the 2011 top.
Pleasenote that just as what we saw earlier this year, gold initially showed somestrength - in February 1996 - by rallying a bit above the previous highs. TheUSD Index bottomed in April 1995, so there was almost a yearly delay in gold'sreaction. But in the end, the USD - gold relationship worked as expectedanyway.
TheUSD's most recent long-term bottom formed in February 2018 and gold seems tohave topped right now. This time, it's a bit more than a year of delay, butit's unreasonable to expect just one situation to be repeated to the lettergiven different economic and geopolitical environments. The situations are notlikely to be identical, but they are likely to be similar - and they indeedare.
Whathappened after the February 1995 top? Gold declined and kept on declining untilreaching the final bottom. Only after this bottom was reached, a new powerfulbull market started.
Pleasenote that the pace at which gold declined initially after the top - in thefirst few months – was nothing to call home about. However, after the initialfew months, one could reportgold’s decline as really fast.
Let’scompare the sizes of the rallies in the USDX and declines in gold. In the early80s, the USDX has almost doubled in value, while gold’s value was divided bythe factor of 3. In the mid-90s, theUSDX rallied by about 50% from its lows, while gold’s value was divided byalmost 1.7. Gold magnified what happened in the USD Index in both cases, if wetake into account the starting and ending points of the price moves.
However,one can’t forget that the price moves in USD and in gold started at differenttimes – especially in the mid-90s! The USDX bottomed sooner, which means thatwhen gold was topping, the USDX was already after a part of its rally.Consequently, when gold actually declined, it declined based on only part ofthe slide in the USDX.
So,in order to estimate the real leverage, it would be moreappropriate to calculate it in the following way:
Gold’sweekly close at the first week of February 1996: $417.70USDX’sweekly close at the first week of February 1996: 86.97Gold’sweekly close at the third week of July 1999: $254.50USDX’sweekly close at the third week of July 1999: 103.88TheUSD Index gained 19.44%
Goldlost 39.07% (which means that it would need to gain 64.13% to get back to the$417.70).
Dependingon how one looks at it, gold actually multiplied USD’s moves 2-3 times duringthe mid-90 decline.
Andin the early 1980s?
Gold’sweekly close at the third week of January 1980: $845USDX’sweekly close at the third week of January 1980: 85.45Gold’sweekly close at the third week of June 1982: $308.50USDX’sweekly close at the third week of June 1982: 119.01TheUSD Index gained 39.27%
Goldlost 63.49% (which means that it would need to gain 173.91% to get back to$845).
Dependingon how one looks at it, gold actually multiplied USD’s moves by 1.6 – 4.4 timesduring the early-80 decline.
Thismeans that just because one is not using U.S. dollars as their primarycurrency, it doesn’t result in being safe from gold’s declines that areaccompanied by USD’s big upswings.
Let’sget back to the topic of gold price in Indian rupees. If gold’strading in 2020 is going to resemble its mid-90s performance, thenit would be a good idea to check what happened with gold in terms of Indianrupee at that time.
Goldfrom the Indian Perspective
Goldprice in terms of the Indian rupee declined about 30% from its 1996 top beforeforming the final bottom. That’s not a small move – that’s a move that coulderase a large part of the buy-and-holdinvestors capital and it would take many months to just get back to the initial level. Ifone managed to get out close to the top, or even profit thanks to adjustingone’s positions to the ones that profit from gold’s decline, it would beentirely different and much more pleasant.
Thehighest weekly closing price of 2019 is 109151 per oz. A 30% decline from thishigh would imply a move to about 76400. Based on the nearby technical supportlevels, this would imply either a decline back to the late-2016 bottom, or the2015 bottom. If we see a particularly bearish marketnews,gold could decline even below the 2015 bottom. Of course, we can’t guaranteethat this will indeed happen, but it seems that gold could decline quite a lotbefore the final bottom forms.
Ifit seems like it can’t happen, because the price rallied so high so soon,please note that the times after sharp upswings were exactly the times whengold was starting the declines – especially in 2013 and 2016.
Allthe above might seem quite complex, so let’s discuss it once again, this timeusing a brief Q&A:
Goldis likely to decline in the following months, also in terms of the Indianrupee.
Butwhy? It’s been rallying so nicely in the recent years…Thereare numerous reasons, but one of the key ones is the epic breakout in the USDIndex that was more than confirmed. Big USD Index rallies follow suchbreakouts, and they sooner or later trigger big declines in gold.
Sowhat? If I live in India, why should I be concerned with the U.S. dollar? I’mnot using it and I’m buying gold with rupees.Thebig USD Index rallies trigger declines in gold that much bigger than the saidrallies. This means that even if you never bought anything using U.S. dollars,the big increase in its value can still affect you, if you’re investing orconsidering investing in gold.
Really?Did it happen in this way when the USD was previously gaining value quickly?Itdid. Back then – in mid-90s – gold priced in the Indian rupee declined by about30%. It doesn’t have to happen again, and nobody can guarantee any outcome, butthat’s exactly what happened.
Ouch…So, is a decline in gold really likely in 2020?Again,we can’t guarantee anything with regard to performance, market movement, orindividual stockpicks,but in our view it’s very likely that we’ll see much lower gold valuesbefore we see much higher prices. A decline below $1000 in terms of the USDis likely in our view. Gold price in terms of the Indian rupee could move toits late-2016 bottom, the 2015 bottom or even below it. The $890 target in theUSD terms seems to be the most precise one and it appears to be a good idea tomonitor gold price movement and make goldprice forecasts based on the USD perspective in order to determinethe optimal entry point for big long positions and perhaps to exit the positionsthat would be aimed to profit from lower gold prices.
Thefull version of this analysis isn’t just about gold in Indian rupee termsthough. By the way, such a view is beneficial to the many non-U.S. currenciestoo. This analysis’ full version discusses yesterday’s strength in miningstocks and the key factors at play and the targets of our promising shortposition. We encourage you to join our subscribers and reap the rewards. Subscribetoday!
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Thank you.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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