In the past ten years, drivers behind the rise in the price of gold include large demandincreases from individuals in China and other emerging markets, geopolitical conflict, hedging against the end of the dollar, and quantitative easing.
What could be the next driving force? It is possible that the recent election in India could drive gold much higher.
How could the recent Indian elections drive the price of gold higher? Simply put, demandmay skyrocket should the newly elected conservative Indian government eliminate unneeded import tariffs on imported gold. (The key assumption in the debate is whether the newly elected Indian government actually takes on free market principles beyond just political rhetoric.)
The conceding of defeat by the current ruling party occurred on May 16, 2014. Here is what precious metals have done from May 9 to May 25.
Overall, surprisingly, not much movement.
Why has there not been much movement even though an elimination of tariffs would certainly put upward pressure on demand.
First, businesses looking at future demand may be taking a wait-and-see-approach. Essentially, if the Indian government plans to eliminate tariffs on gold imports, consumers may think the price of gold is on its way down (at least the price paid by the consumer). Presuming Indian consumers think this, consumers would be best served by putting off their purchases until the gold tariffs were eliminated. This argument points to short-run downward price pressure and long-term price appreciation. Interestingly, as evidenced by the previous graphic, the short-run downward price pressure has yet to materialise, perhaps because consumers and businesses are long-term "investors" rather than market-timers.
Second, whether the newly elected Indian government will actually implement useless regulation is still up for debate. As with any elected government, actions speak louder than words.
Third, the upward pricing pressure still heavily outweighs any downside risks, including geopolitical concerns in Ukraine, the demise of the dollar, and concerns about the sustainability of the current growth projections.
Fourth, although professionals only slightly pay attention to such rumours, there are still some downside indicators, including the "Indian Mommy Indicator," which is pointing towards gold at $1,000 instead of $1,500.
The problem with the "Indian Mommy Indicator" is that it is more of a lagging indicator, or at best a coincident indicator, rather than a leading indication of where the price of gold is going.
Overall, with gold in a general holding pattern since March, government policy out of India may be the catalyst for further price appreciation of the world's most influential precious metal.
