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Is This Disappointing News Showing Gold's Strength?

I usually try not to report on the same commodity two days in a row. But as per yesterday's note, key events in the gold market last night are revealing some critical insights into this sector.

The main event was of course India's new budget. Which had been widely expected to include a cut in gold import duties--perhaps to as low as 6%, from the current rate of 10%.

But that failed to materialize. With India's new government instead choosing to keep import taxes unchanged at 10%. Officials also failed to deliver any reforms to the so-called "80:20 rule". Which places further restrictions on gold imports, by requiring that 20% of incoming gold be re-exported to foreign buyers.

The market was surprised, to say the least. With analysts globally noting that all data had pointed toward a much different outcome.

But amid the disappointment, one key observation stands out: the gold price is holding steady. In fact, bullion is up about $10 per ounce since the budget announcement--trading above $1,340 as I write.

That's the highest gold price we've seen in nearly four months. Edging closer to the high of $1,385 achieved on March 14.

This could signal that gold's fundamentals are strengthening--with or without renewed Indian buying as a driver.

And there's reason to believe the India story isn't over yet.

Reports from the country's finance officials yesterday showed that India's trade deficit is continuing to shrink. With the spending shortfall dropping 42.4% for the quarter ended June 30.

The improving balance of payments is giving regulators some latitude in eventually cutting gold import taxes. Which were imposed largely to prevent trade outflows--and support the value of the rupee.

At the same time, figures released yesterday show that gold smuggling continues to be a major issue in the country. With seizures of illegal bullion having jumped 531% in 2013, to nearly 41,000 ounces.

We'll see what path forward emerges here. But it appears that whatever the case, the gold market is moving on with things.

Here's to getting over it,

By Dave Forest




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