Update on Gold Indicators for April: Who's Buying, Who's Selling? (Part 12 of 12)

(Continued from Part 11)

Tracking China’s and India’s (EPI) inflation figures can give investors insight into the future direction of gold prices. The figures also suggest what could happen with gold-backed ETFs such as the SPDR Gold Trust (GLD).

With this in mind, you can decide what to do with gold stocks such as Goldcorp (GG), Sibanye Gold (SBGL), and Harmony Gold (HMY). You can also decide how to invest in ETFs such as the Market Vectors Gold Miners ETF (GDX). GG, SBGL, and HMY make up 7.3%, 2.3%, and 1.0% of GDX’s holdings, respectively.

We’ll use the ten-year government bond yield as the nominal interest rate in India. We’ll use the year-over-year change in the consumer price index (or CPI) as India’s inflation.

CPI data are released monthly by India’s Central Statistical Organization. These data measure the average changes in the general price for a basket of consumer goods and services over time.

According to the latest data, India’s inflation in March was 5.17% year-over-year compared to 5.37% year-over-year in February. Inflation has been higher than benchmark interest rates and government bond yields for a long time. This caused negative real interest rates, which discouraged savers. But now, things are changing. Inflation fell rapidly in 2014 and is continuing on a steady path in 2015.

In India, the yield on a ten-year government bond is currently 7.74%. Adjusted for 5.17% inflation, the real return comes in at 2.57% for March. This is higher compared to 2.36% for February. India’s real interest rate has risen rapidly in the last few months due to declining inflation.

Increasing real interest rates could motivate some urban gold investors to move to other investments. But the majority of India’s population is rural. They don’t have easy access to banks and other investment options. Gold is an easy and available investment option for them. To an extent, it maintains their purchasing power. This makes gold one of the most popular investments.

Browse this series on Market Realist:

• Part 1 - What Key Variables Are Impacting Gold Prices?
• Part 2 - Jobless Claims Inching Up in April: Is It Positive for Gold?
• Part 3 - US Dollar Softens in April, a Plus for Gold