July 5, 2022

India’s Attempt To Curb Gold Purchases Will Ultimately Fail

India may increase the import tax on gold for the third time this year in an attempt to shore up the weak rupee.  Purchases of gold and silver account for a huge 12.5% of all Indian imports and are contributing to a record current-account deficit according to Bloomberg.

“The government may look at increasing the duty to 7.5 percent,” Prithviraj Kothari, president of the Bombay Bullion Association, said in a phone interview. D.S. Malik, a finance ministry spokesman in New Delhi, declined to comment.

The tax on bars and coins was doubled to 4 percent in March after imports jumped to a record 969 metric tons in 2011. A further increase may deter jewelry buyers and investors during India’s festival season, which starts this month, as a decline in the rupee against the dollar boosts domestic gold prices to an all-time high. Imports plunged 42 percent to 340 tons in the first half, according to the producer-funded World Gold Council.

Curbing shipments of gold will help the country to narrow the current-account deficit as the drop in rupee boosts the cost of crude-oil purchases, according to the finance ministry. The shortfall widened to a record 4.2 percent of the gross domestic product in the year ended March from 2.7 percent in 2010-2011.

The rise in the deficit, the broadest measure of trade, was due to slower exports and so-called relatively inelastic imports of petroleum products, gold and silver amid a rally in global prices, Finance Minister P. Chidambaram said on Aug. 23.

Will India’s attempt to restrict import of precious metals be successful and what impact will this have on the price of gold and silver?  Let’s consider the following:

1.  The Indian government should know better.  In 1962, India passed the Gold Control Act which prohibited Indian citizens from owning gold bars and coins.  The result was the instant creation of a huge black market that continued to supply gold and silver throughout India.

The (Gold Act) legislation killed the official gold market and a large unofficial market sprung up dealing in cash only. The gold was smuggled in and sold through the unofficial channel wherein, many jewelers and bullian traders traded in smuggled gold. A huge black market developed for gold.

In 1990, India had a major foreign exchange problems and was on verge of default on external liabilities. The Indian Govt. pledged 40 tons gold from their reserves with the Bank of England and saved the day. Subsequently, India embarked upon the path of economic liberalization. The era of licencing was gradually dissolved. The gold market also benefited because the government abolished the 1962 Gold Control Act in 1992 and liberalized the gold import into India on payment of a duty of Rs.250 per ten grams. The government thought it more prudent to allow free imports and earn the taxes rather than to lose it all to unofficial channel.

2.  India should be more concerned with maintaining a currency that offers their population a stable store of value rather than depriving their citizens of viable alternate currencies such as gold and silver.

3.  The centuries old tradition in India of holding gold and silver as a source of liquidity and for capital preservation is unlikely to change.  The rupee, like most other paper currencies, has been systematically debased.  Inflation in India over the past decade has made holding rupees a losing proposition.

Courtesy: inflation.eu

4.  The reduction in gold demand during the first half of the year by both China and India has been widely touted in the mainstream press as a reason for a continued sell off in the precious metal markets.  Right.  Despite the reduction in gold demand by China and India, gold based out in the $1,600 range before rallying sharply to $1,697.   Gold is now $99 or 6.2%  higher than it was on the first trading day of 2012.

courtesy: stockcharts.com

5.  By attempting to restrict gold purchases, India has simply advertised the rupee’s intrinsic lack of value to their citizens which will ultimately create an even greater demand for gold and silver.

Gold Demand Soars As Chinese Buying Surges To Record Levels

According to the World Gold Council, total global demand for gold in the first quarter of 2011 jumped by 11% to 981.3 tonnes.   Gold demand was driven by increased investor purchases, especially in China where surging demand for gold reached record highs.

The World Gold Council foresees increased 2011 gold demand based on fundamental factors that include unrest in the Middle East, the sovereign debt crisis in Europe, global inflationary worries, weakness in the U.S. dollar, concern over a slowing U.S. economy and continued strong physical demand for gold by China and India.  Increased purchases of gold by central banks is also likely to increase to protect reserves against paper currencies issued by over indebted sovereign nations.

The World Gold Council noted that gold hit its eight consecutive record high price during the first quarter of 2011 after a brief pullback in prices early in the year.   Due to higher prices the value of gold purchased during the first quarter rose by almost 40% from $31.4 billion to $43.7 billion.

Investment demand surged by 26% during the first quarter to 310.5 tonnes and represented 31.6% of total first quarter gold demand.  The investment demand category includes physical bars, official coins, medals and ETF products.  Investors showed a strong preference for holding physical gold as bar demand increased by 62%, official bullion coins by 39% and medals by 3%.  Bullion holdings by ETFs declined by 55.9 tonnes during the quarter as investors decided to hold more physical gold due to worries about counterparty and credit risk.  Despite the reduction in first quarter ETF holdings, total global holdings of ETFs amount to 2,100 tonnes valued at approximately $95 billion.

Jewelry demand of 556.9 tonnes accounted for 56.8% of total gold demand during the first quarter.  Total jewelry demand grew by 7% during the first quarter with India and China accounting for 63% of total demand.  China, which has seen explosive demand for gold over the past decade, registered a 21% increase in jewelry sales to 142.9 tonnes.

Technology demand for gold, which includes electronics, industrial and dental use declined slightly to 113.8 tonnes.  Gold demand by the electronics industry remains strong and during 2010, the industry consumed a record 326.8 tonnes.

Despite the surging global demand for gold, supply is not increasing and actually dropped by 39.9 tonnes or 4.4% during the 2011 first quarter compared to last year’s first quarter.  The decline was primarily due to large central bank purchases which the World Gold Council deducts from available supplies.  Central Banks have been rapidly increasing their purchases of gold reserves and during the 2011 first quarter purchased 129 tonnes of gold  which exceeded the total amount purchased during the first nine months of 2010.

Surging gold prices should be a natural incentive for the mining industry to increase production but this has not been the case.  Mine production increased by only 7% to 663.9 tonnes during the first quarter, trailing total demand of 981.3 tonnes.  During 2010 gold mine production provided  62% of total supply with recycled gold accounting for the bulk of other supply.

The big picture in the gold market remains focused on China.  The World Gold Council report notes that “The past 10 years have witnessed exponential growth in China investment demand for gold, which entered a new era with the opening of the Shanghai Gold Exchange.   By the end of 2010, annual gold demand totalled 187.4 tonnes, an increase of 71.1% over the previous year.”

Chinese gold demand has been increasing by 14% per year since 2001 with jewelry accounted for 64% of total demand.  During 2010 gold jewelry demand in China was 451.8 tonnes, up 100% since 2004.  Chinese gold investors are also huge buyers and in the first quarter of this year were the largest buyers in the world of physical bullion coins and bars.

The World Gold Council expects Chinese gold demand to double within less than ten years due to gold demand based on Chinese culture, inflationary fears, buying by the Chinese Central Bank, a desire to diversify wealth holdings, advise from prominent Chinese economists to increase gold reserves, increased institutional demand and increased demand by a growing middle class.

Courtesy World Gold Council

 

Gold Demand Soars as Supplies Increase Marginally

Gold demand increased strongly across all sectors during 2010, as the supply of gold barely increased.

According to the World Gold Council, global demand for gold hit a 10 year high of 3,812.2 tonnes worth $150 billion.  The demand for gold hit an all time high in value as gold prices hit a record high of $1,421 per ounce on the London PM fix.  Typically, as the price of an item increases demand will decrease, but in the case of gold, it seems that  higher gold prices are creating more demand.  The risk of sovereign defaults, inflation, economic concerns and weak currencies have convinced many investors that gold is  integral to the preservation of wealth.

The demand for gold in 2010 was nothing less than extraordinary considering the 25% increase in gold prices.  The London PM Fix price of $1,121.50 at the beginning of 2010 increased steadily throughout the year and closed on December 30, 2010 at $1,405.50.

The World Gold Council noted that key factors affecting the price of gold during 2010 included the following:

  • Jewelry demand increased by 17% over 2009, with demand particularly high in both India and China.  Asia accounted for 51% of total investment and jewelry demand during 2010.
  • For the first time in 21 years, central banks became net purchasers of gold.
  • Investment demand for gold during 2010 was actually down by 2% in 2010 to 1,333 tonnes, but was the second highest demand year on record.

Gold Demand - World Gold Council

The value of gold demand skyrocketed by 38% in 2010 to $150 billion, despite the 40% increase in gold’s value since 2008.  The statistics for specific demand categories, according to the World Gold Council were as follows:

  • Total gold jewelry demand increased by 17% to 2059.6 tonnes despite increased gold prices.  The value of jewelry demand was $81 billion.
  • Investment demand for bar and coin and ETFs remained stable in 2010, down only 2% from the previous year.  In value terms, demand strongly increased by 23% to $52 billion.  Demand for physical bars increased by 56% to 713.2 tonnes.
  • ETFs accounted for 9% or 338.0 tonnes of gold during 2010 which was down by 45% from the peak of 617.1 tonnes in 2009.  At year end 2010 gold holdings by ETFs amounted to 2,175 tonnes worth $96 billion.
  • Gold demand by the technology and electronics industry rose 12.4% to 419.6 tonnes.
  • The market with the strongest growth in gold demand was India.  Gold demand by Indian consumers increased by 66% to 963.1 tonnes worth $38 billion.
  • The market with the strongest investment demand was China which saw a 70% increase in demand for coins and small bars to 179.9 tonnes worth $7 billion.

Total gold supply increased by only 2% as mines struggled to find new deposits and increase production from existing mines.  Out of total yearly gold supply, 40% comes from recycled gold.

Signs of Chinese Demand for Gold

China is the world’s second largest consumer of gold, so their interest in the metal is understandable. It is also the world’s largest producer of the metal. Still, the country is exhibiting a newly invigorated consumer and investor interest in the metal that is bound to capture some attention.

The Gold Reserves

Notoriously secretive, China rarely either publishes gold trade figures or comments on its reserves. It came as a shock, therefore, to find out from the State Administration of Foreign Exchange that state reserves of gold have increased to a jaw dropping 1,054 tonnes. The last time that reserve figures were made public was in 2003 when they equaled 600 tonnes. But that only one sign of the current Chinese interest in gold.

Consumer and Investment Interest

Chinese officials have indicated their interest and support for increasing the country’s gold reserves even further. Gold imports in the country have reached 209 tonnes, an impressive amount considering the high for 2009 was only 45 tonnes.

Experts speculate that though there has been no formal announcement, the government is approving these imports in an effort to encourage private gold investment in the country. Either way, investors and consumers are turning to the precious metals to provide themselves with an alternative to the threat of inflation.

The Future is Golden

Representatives for the World Gold Council have speculated that the investment demand for the metal could reach to 150 tonnes. The retail and jewelry demand for the metal, traditionally the driving force behind the metal’s prices, may even double in the next ten years.

The metal’s rise has been meteoric, but there’s no reason to believe that this level of interest will not continue. Predictions state that China will lead a worldwide demand for gold in the next year.

Another Precious Week: Back on Track – Record Breakers

Gold, Silver, Platinum, and Palladium Weekly Recap

So the price of gold has broken the $1,400 mark, whatever.  The biggest news is that we shrug off records such as these being broken.

The pundits are saying that this is a “flight to safety”, to which we say that’s so last week.  Literally last week.  If you’re memory was at the top end of the gold fish scale (and we’re talking about market pundits here) you’d remember that the flight to safety was last week when all the other metals were going down but gold was up.

Now gold is up less than the other metals, and we know what that means.  Inflation, baby.  Sure enough, oil is up as well.  In fact gold really didn’t show much form until Friday, and that was only because of Chinese figures.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,403.50 +48.50 (+3.58%)
Silver $28.74 +2.12 (+7.96%)
Platinum $1,718.00 +79.00 (+4.82%)
Palladium $758.00 +88.00 (+13.13%)

This inflation hedging should be slightly puzzling, after all the Quantitative Easing announcements were a few weeks ago and the bank rescues in Europe may have been mildly inflationary, but they are also a reminder that the whole thing could go down in a deflationary spiral that will hit precious metals.

That’s because we’re looking at the west.  As we’ve been arguing for some time the consumer demand in the east is where the action is.  And the Chinese are very worried about inflation.  China has released figures that have shocked the markets showing that the demand for gold is five times what it was last year.  This is about a third of the total consumer gold demand. The Chinese are scared stiff of inflation, which is going out of control, particularly with a weak currency due to the dollar link.

Precious metals are the answer, and China has historically been particularly fond of silver rather than gold.

Governments are also actively buying, particularly Russia which has overtaken Japan to become the eighth biggest Central Bank holding gold.  And they got the World Cup soccer competition.  Lucky Russia.

In the silver market the talk is about market manipulation and short positions, with some people speculating that the traders who took out the massive short positions need to cover their positions and actually buy silver.  Well perhaps.

Palladium and platinum have also proved to be very tight markets, with palladium getting to its highest price since April 2001.  Palladium in particular has a very narrow supply base, with much of the mines being in Russia.