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India Spicing Up the Gold Market

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Readers of NicholsOnGold know we have long been of the view that robust Indian gold consumption in the years ahead would be an important pillar supporting significantly higher prices in the world marketplace.

But since mid-2013, the Indian government’s anti-gold policies have put this scenario on a temporary hold as buyers within India have been reluctant to incur the high cost of the government’s punitive anti-gold policies. Now, however, last month’s election of Narandra Moti as India’s new prime minister promises new economic policies – including a scaling back of gold import taxes, set at 10 percent last July, and the abolition of the costly “80:20 rule” that requires dealers to re-export 20 percent of the gold brought into the country, presumably as higher-cost, value-added jewelry.

Meanwhile, expectations that India’s new government will soon ease the country’s stringent anti-gold import restrictions are now weighing even more heavily on India’s appetite for the metal – and the world market price – as many prospective buyers within India await more favorable market conditions in the very near future.

Our friends in the Indian gold trade say they expect the import tax will be rolled back from 10 percent to two percent – and there is some possibility it will be scrapped altogether along with the 80:20 scheme.  Should the upcoming Moti budget roll back import duties and abandon other anti-gold policies, as we expect, pent-up demand for gold within India may unleash a gold-buying spree that, other things being equal, could send the world price much higher. 

Mr. Moti, the new prime minister, and his Bharatiya Janata Party (the BJP) won the recent national election by such a wide margin that there is now a mandate to overhaul the country’s economic policies.  On the macroeconomic front, we expect much more market-oriented, pro-growth, policies that according to some analysts could boost long-term economic growth by two or three percent per year above the recent four-to-five percent annual growth rate.

In India – with its strong historical, cultural, and religious affinity to gold – higher economic growth and rising personal incomes mean more money will be available for gold jewelry, investment, and household savings. 

Although high inflation – currently around nine percent – has prompted some to buy gold as a hedge asset and store of value, a lower inflation rate along with higher real growth will be, over time, much more propitious for Indian gold demand.

With expectations of lower gold import costs around the corner, India’s bullion dealers, jewelers, households, and investors are now postponing their purchases in anticipation of lower gold import taxes and more favorable local market prices ahead.  As a result, gold imports are at a low ebb.

The decline in India’s gold imports has been so sharp that the impact on the world market price should not be underestimated.  At first, weaker gold imports were merely a consequence of costly import taxes and the imposition of the 80:20 scheme last year.

However, following the national elections in May, Indian gold demand has softened still further.  This reflects current expectations within the Indian gold community that import taxes and other anti-gold import barriers will soon come down.

Other things being equal, we believe the price today might be $50 to $100 higher but for India’s gold import irregularities. 

The new government will likely reveal its hand with respect to gold in its forthcoming budget document due to be issued next month.  In any event, a significant relaxation (or total revocation) of the current anti-gold policies is likely to take effect by late August, just ahead of the September-December festival and harvest season when a lion’s share of the country’s annual gold buying typically occurs.

With India’s help, the world gold market could be off and running later this year.