Gold Prices Hit By Weak Indian Rupee

Chris Greenhough

Gold prices have dropped by more than 10% since February 2012, due to a decline in India's currency, the rupee.

What links gold prices and the rupee? Simple: India is the world's biggest gold consumer. The World Gold Council says the country accounts for 27% of the world's demand for gold jewelry and investment. That means a weakened rupee (and consequently fewer Indians buying gold) has a significant bearing on global gold prices.

New taxes and recent protests and boycotts have also deterred Indian consumers from buying the precious metal with their usual vigor, despite the fact gold is so common at weddings and festivals in India.

Only last week, India's Finance Minister Pranab Mukherjee was forced to repeal a recently introduced domestic tax on the sale of gold jewelry. Said tax brought an angry response from gold merchants in India, who promptly pulled the shutters down on their stores for three weeks. This strike action negatively affected global prices, according to Harish Galipelli, head of research at JRG Wealth Management, a commodity brokerage firm.

While the strikers ended their action on April 6, having won their battle with the government, the weak rupee could pose a more long-term threat. The currency's weakness is ensuring local gold prices stay high, even while global gold prices drop.

Jeffrey Rhodes, the Dubai-based global head of precious metals at INTL Commodities DMCC, says:

"The weakness of the rupee is countering the fall in the dollar price of gold and is likely to act as a drag on demand in the world's biggest market. For me, the key to gold demand in India is the price in rupee terms."