Nations Put Pressure on Gold

National news put pressure on the gold markets last week. India and China, the world’s top gold consumers, both received blame for inciting demand fear. India’s contribution came in the form of gold-related protests, while China’s damper on the market was connected to manufacturing data that reignited fears of an economic slowdown. Added to these events was news of a military takeover in Mali, Africa’s third-largest gold producer.

Last week began with, and saw the continuation of, a gold strike in India that involved jewelers and bullion dealers closing their shops and staging demonstrations. India’s gold industry outrage is the result of government attempts to steer the nation’s cash away from gold using tax increases.

India has a swelling current account deficit, but its citizens have a penchant for gold, which the government recognizes as exacerbating the problem. The Economic Advisory Council (EAC) calculated that gold imports up to January of this year had reached $50 billion, and are expected to be $58 billion for fiscal year 2011/12, which ends on March 31.

Gold, seen by most Indians as an investment, is increasingly viewed by the government as an unproductive use of financial resources. For the most part, it’s purchased – consuming cash – and held by its owners, thereby failing to provide the nation with any economic benefits.

“There is clearly [the] need to examine and rectify the situation so that household savings come back to the organized financial market and are used in the creation of the nation’s modern infrastructure and industrial base,” an EAC report says.

The Union budget for 2012/13 therefore calls for a one percent excise duty on unbranded gold jewelry and a doubling of the customs duty on gold imports. The move follows a change in duty structure earlier this year that made gold more expensive.

Sheel Chand Jain, President of the All India Sarafa Association, reportedly drafted a letter to officials pointing out that a similar measure had been attempted with regards to jewelry in 1981-82 and had to be withdrawn.

Gold is ingrained in Indian culture, which has led many to believe that the government’s initiatives will fall short. Still, the measures are of concern because while taxes may not curb Indians’ appetite for gold, higher costs could limit their ability to afford as much of it. For the larger gold market, the result may be significant declines in demand and downward pressure on prices.

China’s declining PMI

The gold markets were severely disappointed in China when HSBC’s Flash Purchasing Managers’ Index (PMI) revealed that manufacturing had declined for the fifth consecutive month. Falling from 49.6 to 48.1, China’s PMI is now further below 50, and anything below that level suggests a contraction.

This fall renewed fears that the nation’s economy is slowing at a much faster pace than is often suggested. The slowdown is viewed by many as anti-inflationary, and since gold is widely viewed as an inflation hedge, the metal loses appeal when inflationary concern subsides.

Furthermore, there is a saying that as China goes, so go commodities. That the world’s second-largest gold consumer appears to have a contracting economy is viewed as overall bad news for gold as it suggests that gold demand is declining.

Mali’s military takeover

Last week the military seized power in Mali. This action was reportedly born out of frustration among soldiers who have been fighting against Tuareg rebels seeking independence, but feel the government has failed to provide them with adequate arms and ammunition.

This news had a negative impact on the shares of gold mining companies operating in the nation, and analysts and investors appeared concerned about the impact this political problem could have on sales and perception.

Especially hard hit was Randgold Resources (LSE:RRS,NASDAQ:GOLD) whose stock saw a 13 percent drop on Thursday. Over 5.8 million shares were traded in the two days following the military action as opposed to a three-month average of about 600,000 shares.

JP Morgan downgraded Randgold’s stock from neutral to underweight and Citigroup changed its rating from buy to neutral.

A number of other miners operating in the country saw weakness in their shares following the event, including Cluff Gold (LSE:CLF,TSX:CFG), IAMGOLD (NYSE:IAG,TSX:IMG), AngloGold Ashanti (NYSE:AU), and Avion Gold (TSX:AVR,OTC Pink:AVGCF).

Several of these companies, including Randgold, issued statements saying they are monitoring the situation, but operations are continuing normally.

Gold Fields (NYSE:GFI), which also witnessed stock price declines after the takeover, is an exception. The company reportedly stopped drilling at its Yanfolila exploration site. At the time of publishing, the company had not responded to requests for more information about this decision.

The initial shock in the equity markets appears to have faded rather quickly, and most of Mali’s gold miners are on much better footing now than they were immediately after the event.

The story is still developing, but the international community has quickly snapped into action with the African Union suspending Mali, and the EU, World Bank, and African Development Bank cutting off Mali’s development aid.

This week it was announced that the airport would partially reopen for civilian transport. It remains unclear when the borders, which were also closed, will be reopened.

Takeaway for investors

Emerging nations are increasingly relied upon to play key roles as both consumers and suppliers. With that dual expectation comes the growing ability of emerging nations to impact global markets. India, China, and Mali’s national news highlights that and serves a reminder that despite popular sentiment or comfort levels, there are still notable financial and political risks associated with emerging markets, and assessment of them is an ongoing requirement.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.