Will India's Changes Bring Headwinds for Gold?

I'm not a "gold bug", but think precious metals have their place in a portfolio, especially one that's concerned with preservation of capital. So this definitely caught my eye.

India, the world's largest consumer of gold, is close to finalizing some sweeping changes in it's domestic market, according to an article in The Economic Times. It's anticipated that by the end of June, online trading of Indian gold delivery bars will commence. Up until now, trading has been almost exclusively in imported gold bars, which have been certified by the London Bullion Exchange Market Association.

The majority of imported bullion trades in 100 gm. and 1kg. sizes. The inital trading of Indian bars will be in 8 gm., 10 gm., and 100 gm. sizes. The Indian Bullion Market Association's technical committee has formulized the terms and conditions for the bars, which will come from certified gold recyclers, and will be certified as to quality and weight.

India imports between 500-700 tons of gold annually, and is the largest exporter of gold jewelry. Some estimates place the amount of gold in private hands in the form of jewelry as high as 25,000 tons (roughly a 5 year supply of India's imports), and the government has made attempts in the past to introduce this source into the mainstream gold market. Now, I sincerely doubt that all, or even most of that gold will suddenly come onto the market, especially given the status of gold in the Far East as a store of wealth, but the success of this venture would, I think have an effect on the price of gold, even from a purely psychological standpoint.

Source: The Economic Times via InfoNgen

Disclosure: Long GG

Comments

[c300man:]

There is a discrepancy in some of the data. If the yearly import is 500 tons and the gold in private hands is 25,000 tons it would represent 50 years worth of imports.

Jun 19 09:48 AM

[Old Trader:]

c300man,

Not really. If you think about it, one of the attractions of gold is that it can't be destroyed, or consumed. Do you have a grandmother with a gold wedding band? There's a 50 year old (at least) piece of gold, right there.


On Jun 19 09:48 AM c300man wrote:

> There is a discrepancy in some of the data. If the yearly import
> is 500 tons and the gold in private hands is 25,000 tons it would
> represent 50 years worth of imports.

Jun 19 10:24 AM

[GMiki1:]

India's place in gold imports is still strong but has lessened since we are facing other types of strong global investment demands. Once the public understands what's going on, very little investment gold will be available. They will then go to the gold mining stocks.

Jun 19 11:41 AM

[Dana H.:]

Your reply to c300man's comment is a non sequitur. The relevant section of your article states:

"India imports between 500-700 tons of gold annually, and is the largest exporter of gold jewelry. Some estimates place the amount of gold in private hands in the form of jewelry as high as 25,000 tons (roughly a 5 year supply of India's imports),..."

At least one of the above numbers is wrong, because 25,000 divided by 500 is 50, not 5. Stated another way, if 25,000 tons represents a 5 year supply of India's imports, then India's annual imports must be 5,000 tons. The age of grandma's wedding band has nothing to do with this; this is an issue of basic math.

Jun 19 11:57 AM

[Old Trader:]

You're correct; I'll look at the article again, to see whether that was the way it was stated, or if, in writing this piece, my fingers moved slower than my mind, always a possibilty. Hopefully, you'll take the point, though, which is there's a whole lot of gold sitting in private hands there, that will be, at least potentially, available to international markets.


On Jun 19 11:57 AM Dana H. wrote:

> Your reply to c300man's comment is a non sequitur. The relevant section
> of your article states:
>
> "India imports between 500-700 tons of gold annually, and is the
> largest exporter of gold jewelry. Some estimates place the amount
> of gold in private hands in the form of jewelry as high as 25,000
> tons (roughly a 5 year supply of India's imports),..."
>
> At least one of the above numbers is wrong, because 25,000 divided
> by 500 is 50, not 5. Stated another way, if 25,000 tons represents
> a 5 year supply of India's imports, then India's annual imports must
> be 5,000 tons. The age of grandma's wedding band has nothing to do
> with this; this is an issue of basic math.

Jun 19 12:15 PM

[LR European:]

"the success of this venture would, I think have an effect on the price of gold, even from a purely psychological standpoint."

I wonder if you think the effect would be positive or negative on the price of gold.

Some of the arguments in your article seem to suggest that this development will provide an exit route which Indians will leap on and presumably depress the price by flooding the market.

On the other hand, improving the liquidity of an asset almost invariably increases its appeal. If Indians discover that their investments in a store of wealth are now more readily converted to cash than before, surely they are vindicated?

The problem would come only when India faced a time of hardship leading to forced sales, but it is a myth to suggest that Indians have only ever been buying gold, so what changes there?

Sounds to me like the positive effects overwhelm the negative.

Jun 19 01:33 PM

[OldLimey:]

I agree entirely with LR European. If Indians want to sell for scrap they are already able to do this - as recycling flows proved during last year's price run-up. It's impossible to know precisely how the dynamics will play out, but I would have thought that broadening the distribution channel in a market which already values gold would likely be positive for demand.

Jun 19 02:56 PM

[Old Trader:]

LR European and OldLimey,

You're both correct in saying that an increase in distribution contributes to pricing "clarity", but clarity doesn't always equal a higher price. It seems that are a couple of possibilities, both of which would probably exert downward pressure on the price of gold. First, this project might work exactly as planned, and some unknown quantity of gold could be introduced into the international market. Obviously, not all of the supply currently estimated to be in jewelry form would come into the market, nor would I think even a majority of it, but the existence of such an overhang would have an effect, I'd think.

Another possibilty is that, while the government of India and the populace accept "Indian bars", they might be excluded from international markets, for whatever reason. In that case, they may still be used for production into jewelry, cutting into the amount that's currently imported for that purpose.

The "best case" scenario for the price of gold would be that so little is recycled, the effect is neglible. Even under either of the first 2 possibilities, I'm not suggesting the price would crash; merely that it might not go as high as might be assumed, given the other factors that effect gold's price. I'm certainly not looking to get out of GG, at this point, and am not averse to even adding to my miner holding via a different miner.

Jun 19 07:22 PM

[Econ 101:]

Maybe people in India hold gold because they dont trust banks nor governments? They are more concerned that their wealth isnt stolen by corrupt politicians (but I am being redundant) rather than receiving a return on investment.

In a country as old as India why does 50 years of gold demand in the hands of the average people seem out of place? I would think there would be more gold in private hands.

Jun 20 02:17 PM

[Fighting Yoda:]

One of the main reasons the gold price has not risen is because of fall in Indian demand. Investment demand from other sources has not been able to offset the loss of Indian demand.

First quarter of this year India was a net exporter - almost the first time ever. Now recently Indian currency has risen against the dollar- helps them buy gold competitively. Let see how all that pans out.

Jun 20 06:22 PM