India is almost always one of the top two nations (along with China) in terms of gold demand on a year-to-year basis, but government intervention has played a major role in actively suppressing that demand over the past year or so.
Suppressed Gold Demand
In addition to a slew of policies known collectively as Gold Monetization Schemes, the Indian government has experimented with different levies on imports of the precious metal, requiring national tax ID cards for gold purchases, forcing gold importers to re-export 20% of their metal, and even overhauling the country’s cash system by eliminating banknotes that amount to a whopping 85% of the value of the country’s circulating money.
The latter measure was supposedly intended to cut down on illegal transactions and other activity in the informal economy. Unfortunately, it left many folks with no money to spend for months while the transition to new money played out.
Needless to say, the government is determined to suppress gold demand in India.
There are an array of factors that have driven the Indian government to take action against the huge number of gold buyers in the country. Chief among these is the negative effect that such large volumes of imported gold have on the trade deficit. This has motivated the government to do whatever it can to curb the level of gold flowing into India.
Along with the sudden move to remove much of the country’s cash, the fact that gold prices have moved higher over the past year or so has also caused many gold buyers in India to postpone their purchases.
In sum, all of these factors severely impacted the country’s annual gold purchases, particularly during the key festival season after rural farmers have sold their harvest and are ready to buy. In 2016, gold imports were their lowest in 13 years, dropping 44% compared to the year previous. On top of everything mentioned above, a weeks-long strike by the country’s jewelers also made it harder for Indians to buy gold during 2016.
However, the latest data show that February’s gold imports leaped to 50 metric tonnes, an 82% increase year-on-year. This release of “pent-up demand” (according to a Reuters analyst) is much closer to the normal pace of India’s gold imports, which have typically totaled between 800 and 1,000 tonnes.
As the wedding season (traditionally celebrated with ample amounts of gold) continues, premia on bullion in India are beginning to normalize, revealing that India’s gold demand did not simply vanish, but has instead been pent-up and suppressed in the interest of the state.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.