Gold Trade: Why high demand for gold may be a good thing for India | 25th March 2015

Much of the recent attention regarding gold trade has been directed at China. This is entirely justified; rapid gold purchases from around the globe have fomented speculation that China is preparing to float its currency. But the truth is no-one really knows what they are planning to do. Their strategy is a manifestation of Deng Xiaoping’s famous maxim “hide your brightness, bide your time”. In other words, they will not show their strength until they can ensure they will achieve their objective.

Ambiguity and speculation over what is, undoubtedly, a very important question for global markets has meant that gold trade in other, highly significant, consumer nations has slipped under the radar. India, for example, currently ranks top in terms of largest gold consumer nations and in the past few years there have been shifts in policy.

Gold is an extremely popular commodity in India; it is as much a symbol of affluence as it is a means of providing future security. Demand for the precious metal has remained high. However, in recent years, India has struggled to balance this demand with its large trade deficit.

Policy makers were so concerned with the overall trade imbalance that in August 2013 the so-called 80/20 rule was imposed. This rule restricted India’s gold imports and forced 20% of any gold shipment to be re-exported by Indian jewellers. The 80/20 rule was scrapped in November 2014 after it became apparent that the domestic jewellery sector was suffering (Figure 1). Policymakers within India instead decided to focus on boosting exports rather than curbing gold imports.

 2015-03-25_CommentsAnalysis_016_IndiaGold_fig01_v01

Figure 1  | India gold jewellery market, 2008 – 2015, the impact of the 80/20 rule
Source | DeltaMetrics 2015

 

This is potentially a very shrewd shift in strategy; Delta Economics does not expect India’s demand for gold to abate with a forecast compound annual growth of 9.5% to 2020. Therefore, instead of cutting gold imports, which was leading to an increase in smuggling, February 2015’s budget suggested a scheme to monetise Indian citizen’s private gold holdings: an estimated 20,000 tonnes. The scheme would allow Indian citizens to accrue interest on any gold deposited into the banks. This could, as a consequence, reduce volatility in the rupee and provide the average Indian household with extra spending power.

At a time when the world’s national banks seem to be realising the potential of having a gold-backed currency, India’s historically high demand for gold suddenly doesn’t seem like such a bad thing.

 

Gold Trade: Why high demand for gold may be a good thing for India  |  Author  |  Jack Harding  |  Analyst and Publications Manager