India’s Wilting Crops Tarnish Gold

August 7, 2012 at 08:22

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A sputtering start to this year’s monsoon rains has forced farmers in India to put their gold-buying plans on hold.

With crops wilting without the heavy seasonal rains that usually start in June, some farmers say it is unlikely they can afford the gold jewelry that is the centerpiece of most Indian weddings.

Azhar Sheikh Azhar, a 32-year-old farmer with an eight-acre property in Dahegaon Village, India, canceled plans for a lavish wedding with gifts of gold jewelry for his niece this year.

“Where is the money for that when we are having trouble thinking of the next meal for the family?” Mr. Azhar said.

Michael Shaoul, chairman of Marketfield Asset Management LLC, a mutual-fund adviser with more than $2.5 billion under management, has recently bet on lower gold prices as the outlook for India’s harvests worsened.

“In India, the monsoon is another negative factor” in addition to high interest rates, which encourages investors to keep cash in relatively high-yielding savings accounts, Mr. Shaoul said.

Adam Sarhan, founder and chief executive at asset-management firm Sarhan Capital, New York, cited the poor weather in India as a reason for recently dumping gold after holding the precious metal in his portfolio for more than a decade.

“As long as [Indian] demand continues to wane, we’re going to continue to see downward pressure on the price of gold,” Mr. Sarhan said.

To be sure, other factors could quickly overwhelm the gold market and send prices rising. Decisive moves by the world’s central banks to print money in order to stimulate the economy is likely to send gold surging, said James Dailey, lead portfolio manager at TEAM Asset Strategy Fund. Any easing could weaken the dollar or euro—or both—and send investors looking for a hedge into gold, he said.

“The marginal demand from investors in the developed world would overwhelm anything that is going on domestically in India,” he said.

Moreover, some investors point out that India’s dominant role in the gold market has been fading in recent years as its imports of the precious metal slowed.

“We’re all aware of the current conditions in India, but India hasn’t been a strong player in the market this year,” said Ani Markova, who manages $600 million at AGF Precious Metals Fund, with about 13% allocated to gold and silver bullion.

“I think China is driving the bus this year,” Ms. Markova said, adding that a pickup in China’s exports has helped offset some of the sluggish demand in India.

Still, India’s dry spell is what is captivating gold investors now and likely to be the primary obstacle to higher prices for the rest of the year, said Jon Nadler, senior metals analyst with Kitco Metals Inc. North America.

“Flat to negative returns in gold is entirely conceivable” for 2012 if the decline in India’s demand accelerates, Mr. Nadler said.

Rainfall in India as a whole is 20% below the 50-year average and, with the monsoon season half over, India is facing the possibility of a full-blown drought in some regions. More than 60% of India’s population directly depend on agriculture.

While rains can pick up in August, the loss of water and lack of sowing triggered by a dry July are enough to impair this season’s agricultural output and could reduce the country’s overall economic growth by about 0.6%, according to economists at UBS.

In India’s northern state of Punjab, 27-year-old rice farmer Amardeep Singh lamented having to scrap plans to throw his younger brother a wedding. Instead, he battled to save his newly sown crop by drawing out groundwater with the help of a diesel-powered pump.

“All my savings are being used up in buying diesel.…The wedding plan will have to wait for at least a year,” Mr. Singh said.