By Nigam Arora
Back in August 1971, President Nixon shocked the world by taking the dollar off the gold standard. The dollar had been on gold standard since Bretton Woods Agreement of 1944. The biggest bombshell for gold investors in 45 years since Nixon announcement may be ahead. That bombshell is a potential ban on import of gold into India . If this happens, there is a high probability of a one-day drop in gold that could reach $200.
A prerequisite to understanding this potential development is to understand what has happened in India recently. Please carefully read India, not Trump, is the real reason behind the crash in gold prices . Before explaining the enormity of such a ban, let us start by looking at the charts.
Start out by looking at a chart of gold futures on the election night. The chart shows how Modi selling overcame Trump buying. A subsequent budding rally was killed by a rising dollar.
Now let us look at the long-term monthly chart of gold using popular gold ETF /zigman2/quotes/200593176/composite GLD +1.55% .
Please note from the chart that during the 2016 rally, gold did not even reach the 38.2% Fibonacci retracement of the move down from the high of $1904 to the low approaching $1000. This indicates weakness. At this time, the rally of 2016 in gold has to be considered a countertrend rally and not the start of a major new trend to the upside. This conclusion will be invalidated only if gold prices rise and go above the 38.2% Fibonacci level shown on the chart. Similar conclusions after reasonable prudent adjustments can be drawn from charts of silver ETF /zigman2/quotes/205744453/composite SLV +3.09% , gold miner ETF /zigman2/quotes/206399889/composite GDX +6.26% and junior gold miner ETF /zigman2/quotes/204075079/composite GDXJ +6.43% .
The chart also shows the level to which gold might fall if India bans gold imports, as well as strong support at the last major low in gold. However, on any major down move, the support shown is highly likely to be broken. The reason is that less-experienced traders will have their stops right below the support. Hunt-and-destroy algorithms used by professionals will simply gun for the stops driving the price lower.
Indian imports are a huge deal
On average, India imports about 700 tons of gold each year. This is an enormous quantity. An abrupt reduction in demand of this magnitude, if there is a ban on Indian imports, will be a major shock to the gold market.
What to do now
At the Arora Report, we caught the rumor of a potential ban very early on. We took this rumor seriously and incorporated it in our models that gave the sell signal in gold right after the U. S. presidential election. However, as a reputable firm with a large number of readers, and not wanting to fan the rumor, we did not publish it.
Even though the media in much of the Western world is mostly still oblivious to this major potential development ahead, we now feel comfortable publishing this for three reasons. First, the premium on gold being sold in India has jumped to $12 per ounce, the highest premium since November 2014. We see this jump in premium as tangible proof that the rumor is taking hold and affecting gold price.
Second, Indian Bullion & Jewellers Association has informed its members that they are hearing from certain circles of a potential ban on gold imports. Subsequent to our earlier information, this has now become public . Third, social media in Asia is abuzz with these rumors.
At this time, it is very important for gold investors to stay plugged into sources knowledgeable about gold in India and be alert to any further signs that an import ban may be in the offing. Now that I have given you a heads up with regard to the potential impact, investors should review their precious-metal holdings to make sure they are comfortable just in case there is a big downdraft.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article and/or may take positions in securities described in this article any time.