by Stefan Wieler
For the past weeks the media and gold analysts have pointed to an apparent collapse in Indian gold demand, implying that gold prices are at risk. However, Indian gold demand doesn’t drive prices; rather, prices drive Indian gold demand. When gold portfolio demand in the financial markets increases (as real-interest rates and currency values decline), traditional buyers in the developing markets that buy gold as a form of savings correspondingly have to reduce quantity demanded (but not value demanded). However, India’s decision yesterday to recall all 500 and 1,000 rupee banknotes overnight might mean Indian savers might not be willing to give up their gold savings all that easily, demanding a higher proportion of their own portfolio allocation from yet another relative currency risk.