Can Physical Gold Demand Support a Floor?

An article at CNBC was recently run suggesting gold may have hit a floor, citing HSBC, which offers three reasons why that may be the case, including retail demand from India and China, slowdown in exchange-traded fund (ETF) gold liquidation, and continued acquisition of gold by central banks around the world.

In-depth look at how physical gold will affect prices.

Gold Prices, Imports, Nuggets, Goldman and Stimulus

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Forget India, China Gobbling Up Gold

Even though financial writers have been pointing to weak gold consumption in India recently, the fact is, historically, it really hasn't played much part in the movement of the price of gold, other than the seasonal impact it annually makes on the price of the metal.

China, in my opinion, is a much different story, as the Chinese government encourages its people to buy physical gold, and the government itself has been buying it up at an ever-quickening pace.

A recent note from HSBC (NYSE: HBC) said the Chinese have boosted their gold coin acquisitions from 5 kg in March to 1,857 kg in April; a huge increase by any measure.

I don't think India is weighing on anyone's minds in reference to the price of gold, as everyone that understands what's going on is looking to which governments will implement another round of quantitative easing.

That, more than anything, will cause the price of gold to skyrocket.

Much of that is centered in the sovereign debt crisis in Europe, which continues to deteriorate, with no real answers to the problem but continuing to implement austerity measures until spending comes in line with reality.

Growing pressure on Germany's Chancellor Angela Merkel to basically underwrite the outrageous spending and out-of-control benefits thrown at many people in the European Union, via eurobonds, points to the euro zone no longer really being valid. It's a joke, and gold could benefit from that exponentially if stimulus again rears it's ugly head, which many in the region are proposing, moving away from the austerity demanded by Germany from other deadbeat countries.

Merckle says it's the lack of competitiveness in the region that is the problem, not throwing more money at criminally irresponsible governments who have made promises they in no way are able to keep.

That's why they want the eurobonds, as it would require the harder working and more productive nations to underwrite the socialist and fascist nations of Europe without those nations having to pay for their horrid decisions.

Merkel chastised the leaders in the region for using the billions in stimulus already spent on consumption, instead of dealing with the lack of competitiveness and implementing real reforms.

She said, “The freedom created by this situation wasn’t exploited to improve long-term competitiveness. Instead, the time was used to spend too much money in consumption and too little time in tackling reforms.”

With all of Europe embracing Keynesianism, even the UK and France are calling for more stimulus and the acceptance of eurobonds. It's an incredible time with the fallout sure to be extraordinary.

More stimulus would obviously be a continuation of the failed economic policies of the region, yet most nations continue to call for more. They better be careful, they may just get what they ask for.

Merkel's right. If there are no changes in attitude and practice, throwing more money at it won't do anything to change the economics, it'll only give a short-term boost which will then have to be paid for as the enormous debt of the nations continue to rise.

This is all about politics, and it'll be interesting to see how it plays out as more and more politicians come up for re-election in their respective countries.

For gold prices, it could, and probably will, shoot through the roof if more stimulus is not only put on the table, but implemented.

India Gold Jewelry Demand Falls 19 Percent

Gold jewelry demand in India dropped 19 percent in the first quarter of 2012, while gold investment demand plummeted 46 percent during the same period.

The horribly inefficient and anti-business Indian government announced it's going to slap a 10 percent duty on non-standard gold and gold jewelery, and another 4 percent import tax on bullion.

In response to the plans, Indian jewelers participated in a nation-wide strike for three weeks to protest the proposed actions.

This has created a volatile gold market in India, resulting in bullion dealers allowing their stock to contract because of the unknown consequences of the government interference in the market place.

After the uproar the Indian government backed down on the 10 percent excise duty on jewelry that isn't branded.

Citigroup (NYSE:C): India Gold Demand Down

Indian imports for gold is down, as surging gold prices has cut down on demand for the precious metal, according to Citigroup (NYSE:C).

“Import data indicates that the surge in gold prices during May appear to be taking their toll,” Citigroup economists said in the report. “Although jewelry demand is typically price inelastic, the run-up in prices has begun to hurt consumption.”

Gold acquisitions in the country dropped by over half, as only 16 metric tons to 17 metric tons were purchased in May, plunging from the 34 metric tons acquired in April.

India has been the largest consumer of gold in relationship to jewelry use, although it really hasn't been a factor in gold prices during the year, although in the wedding season it at times can give it a bump up in price.

Economics is what's driving gold prices now, and that's the reason Indian demand for gold is down. That won't be a factor in the price of gold going forward, but a consequence of it.

Citigroup (NYSE:C) Sees Silver Outperforming Gold

Over the medium term, Citigroup (NYSE:C) says silver prices could outperform gold prices, as industrial demand for silver continue to rise.

Citigroup analyst David Thurtell said this, "Gold is likely to encounter repeated resistance at the US$1,250 mark over the coming month. The seasonal low period for buying in India is upon us, which will take some of the heat out of the market."

Over the six to twelve months, Citigroup thinks silver could reach $20 an ounce.

I'm not that impressed with the idea Thurtell is making his decision in what appears to be seasonal fluctuations in demand from India, which is high during their seasonal wedding periods.

To tie the existing gold market into India gold jewelry demand doesn't compute, and doesn't account for any of the factors as to why gold prices continue to rise.

That being said, the possibility silver will rise higher than gold in the medium-term is definitely a possibility, although it has nothing to do with whether the people of India are buying gold jewelry.

Physical Demand for Gold Increases Ahead of Indian Religious Festivals

Gold is expected to rise based on physical demand, as the Indian religious season is close at hand, and analysts have said the demand is so high at this time for finished products that refiners are having difficulty keeping up with it.

Even so, the major mover of gold prices, the U.S. dollar, is still expected to be the primary mover of gold prices, as many believe gold hasn't bottomed out yet, and until the U.S. dollar corrects, the yellow metal will struggle to make gains in any significant way.