Major Changes Coming to India's Gold Market

Very quietly, two developments occurred in India over the last week that could have major implications for the gold market. Both of these developments could portend drastic changes in gold demand from a key market, just as the inflationistas believe they are at the threshold of a paradigm shift in the precious metal’s pricing.

First some quick background on India’s importance to the world gold market…

Last year, consumers in India made up about 19% of global demand for gold, bringing about 800 tons into the country in 2008. Gold carries a tremendous amount of cultural significance for Indians and is also how they display their prosperity and wealth.

Gold jewelry is extremely important to Indians during the Diwali Festival and for their lavish gift-giving at wedding ceremonies, which seasonally peak around January each year.

It has been estimated that Indians currently have about 20 to 25,000 tons of gold (in the form of jewelry) stashed away in their homes and in vaults.

OK, so clearly, demand from India is important in terms of overall world demand.

So what happens to world demand when measures are taken to increase the internal flow of gold within the country itself? What happens when the importing of gold is penalized while, concurrently, households within India are empowered for the first time to begin monetizing and trading their own vast stores of the yellow metal?

From Metals & Mining: The Gold Standard by Andrew Mikitchook, Thomas Weisel Partners, July 6^th 2009:

The National Spot Exchange in India has launched a single market targeting non-jewelry investment demand. This should lower trading costs and increase liquidity as compared to holding jewelry (estimated 20-25,000t of gold jewelry held in Indian households). In the mid-term this may shift some jewelry demand to investment demand.

The two new developments are as follows:

Melt and Trade

First, The National Spot Exchange (owned by Indian company Financial Technologies) just launched the first-ever spot contract for Indian citizens to buy and sell small amounts of gold in traditional bullion form. Until now, for Indians to monetize their gold, they’ve had to sell the jewelry itself to middlemen who would take anywhere from a 5% to a 10% cut in exchange for this brokerage. The opacity and sloppiness of this process has led to gold being hoarded and stored as opposed to being treated as a liquid asset that could flow freely through a real marketplace.

Now, Indians will have the ability to bring their jewelry to a refinery and for a nominal fee, to have this melted down to bars using the 995 purity standard (995 parts of 1000 are pure gold). Indian households will be able to use these bars to settle their own gold sales made on a transparent exchange. This access to gold monetization is revolutionary for Indians; while roughly 13 million of them trade stocks, most participants on their domestic commodities exchanges are traders, corporations and producers.

To facilitate this new possibility, gold refineries are planned throughout the Indian provinces with 4 new ones coming now and a total of 15 to open by year’s end.

If even a small portion of that 20 to 25 thousand tons in socked-away gold jewelry hits the spot market in India, the demand for imported gold could be dampened even further than the drop-off already seen because of the economy so far in 2009. The first half of this year has already witnessed a wedding-season January import total of only 1.8 tons, this compared to a January 2008 import of 14 tons. Shockingly, there were zero gold exports in both February and March, for the first time in a decade, according to Indian officials.

Tax the Imports

The second gold price-related headwind could be the news from yesterday was that India plans to double the import tax on both gold and silver as part of their new budget. This would be the first time since 1994 that the tariffs on imported gold were raised.

The timing on the tax hike has not been set, and some analysts believe that this could lead to a short-term surge in imports as the market attempts to beat the clock (much like we saw in the US with bankruptcy filings just before the rule change or gun buying just before President Obama’s ascendancy.

While some are downplaying the impact that this will have on gold pricing and demand, clearly, the winners will be the scrap gold sellers and domestic refineries.

What the effect of these two policies and initiatives will be on global producers who sell into the enormous Indian market is the real question to me and one that will only be answered as more details emerge.

Sources:

• India’s Spot Gold Market (Commodity Online)
  
• Traders Criticise Gold Tax (FT)
  
• India Cuts Out the Middlemen (LookAtVietNam.com)

Read Also:

• McDonald's Takes India

Comments

[Roger Knights:]

Maybe this is why there is big money on the short side of Comex gold (in the COT reports). They knew this was coming a month or two ago.

Jul 07 10:51 AM

[Carlos Lam:]

The author's article reveals an inconsistency that I call on him to answer: is gold ownership in India primarily for wealth storage or primarily "of cultural significance?" If the former, then there may indeed be a dampening of import demand. However, in the long-term may even such a dampening be "dampened" itself by India's rising middle class?

If the latter, then I fail to see how a large portion of Indians' gold jewelry will be monetized; will a prized ornament, for example, be thoughtlessly melted down and converted to gold bars? That sounds strange. I am unfamiliar, however, with Indian customs vis-a-vis heirlooms; their view of prized ornaments may differ from ours.

Jul 07 11:39 AM

[Joshua Morg...:]

Hey Carlos,
Thanks for reading...I don't come across in this piece with a strong opinion on what the effects will be, my goal here was simply to frame the debate.

That said, I would imagine that cultural signifcance or not, someone who needs to feed their family in Inida or elsewhere would probably melt and sell...

what are your thoughts?


On Jul 07 11:39 AM Carlos Lam wrote:

> The author's article reveals an inconsistency that I call on him
> to answer: is gold ownership in India primarily for wealth storage
> or primarily "of cultural significance?" If the former, then there
> may indeed be a dampening of import demand. However, in the long-term
> may even such a dampening be "dampened" itself by India's rising
> middle class?
>
> If the latter, then I fail to see how a large portion of Indians'
> gold jewelry will be monetized; will a prized ornament, for example,
> be thoughtlessly melted down and converted to gold bars? That sounds
> strange. I am unfamiliar, however, with Indian customs vis-a-vis
> heirlooms; their view of prized ornaments may differ from ours.

Jul 07 12:12 PM

[HardwoodFlo...:]

Gold is good for a few things:

1) If you ever have to bolt from a country you at least have something that is widely accpted as valuable(or if you need to bribe a border guard).
2) If you are a woman and live in a country where women are not allowed property rights.
3) in case you thing that the world is going to end.

That's just a MACRO opinion. Good luck trading!

Jul 07 01:38 PM

[Ryu Mei Co:]

At this price level, it will take more than just India to push Gold higher, imo. Unless we see another market bear during the summer, Gold and Silver has no way to go but stay on the trading range. I would buy the gold miners since most are already very profitable above $700 per oz. At this gold price level, the miners are pretty much secured.

Jul 07 09:12 PM

[Carlos Lam:]

On Jul 07 12:12 PM Joshua Morgan Brown wrote:
> That said, I would imagine that cultural signifcance or not, someone
> who needs to feed their family in Inida or elsewhere would probably
> melt and sell...

True, but India's economy, unlike ours, is not based upon consumption. Moreover, India's savings rate is far higher than ours; it's above 30% in some of its states! Finally, India has not the drag on its fiscal well-being that are the unfunded liabilities of SS and Medicare. I don't foresee Indians having to sell their gold to feed their families.

That said, India and Pakistan are not bosom buddies. They've been to war twice and are both armed with nuclear weapons. Not the best of situations...

Jul 07 10:08 PM

[jynn:]

I am from India..My mom owns lot of gold ..It is cultural here ...no we do not give off gold to the refinery.....In fact only when a family is in the most desperate of conditions we sell gold...It is a bad omen to see a family selling gold...No one will do it,we off course sell scrap gold ,like jewellery which is bent out of shape,but usually we get some other jewellery for it ,we almost never barter in cash for gold.....very very few of Indian's own gold in bars ...and gold is controlled by women in india...although certificate gold and gold etf's are available ..it is not purchased much in india...gold has to be in a jewellery form ....gold is not purchased as "pure investment"..it is more like a religous/cultural piece of investment ideal to pass on wealth but never actually done...If any one wants to get gold as pure investment ...why do we have go to SPOT market ,we will get it in certificate form or ETF form ,from our local bank...The author maybe correct ..but the will have marginal impact on Indian families who do not even have knowledge of what a SPOT market is ..they will simply go to the nearby family jeweller

Jul 08 07:29 AM

[jynn:]

"Shockingly, there were zero gold exports in both February and March, for the first time in a decade, according to Indian officials."
-----------------
I think author meant ,"Imports",we are net importer of gold

Jul 08 07:37 AM

[jynn:]

Hi joshua,

The numbers are something like this ...currently indians pay 100 Rs ,import duty for 10 Grams of gold ..i.e 100 Rupees for buying something worth 14500 Rs ..around 0.68 percentage ....after the new duty increase we pay double i.e 200 rs for 10 grams..i.e around 1.37 % age ...Not a big change according to me....and remember we just have to pay 200 Rs per 10 gms ...even if gold price goes up ..since the duty is tagged just to the weight and not to the price ..we in India.. would be paying very less import duty if gold price were to shootup...

Jul 08 07:50 AM

[Uppai Mappla:]

I am from India and I own gold both in jewellery and as bullion. For years, all our jewellery is lying in our bank vault because my daughters have no interest in gold jewellery. They describe gold jewellery being "yuck," and "uncool," so do most of their schoolmates. Even my wife considers it embarrassing to wear gold apart from a thin chain and ear studs. We live in Cochin, one of the largest jewellery markets in India where there is a marked shift in jewellery taste among the educated women who consider it unfashionable to wear a lot of gold. This is not a passing fad but a shift that is seen over the years.

In our ancestral village we find people proudly wearing all their gold jewellery on social occasions. But even among the villagers a marked shift in attitude away from gold is taking place. And it is gathering momentum.

The world is looking at India to buy more and more gold as its population becomes wealthier. But those who can really afford gold seem to consider it unfashionable. Such shift of attitudes from cities are spreading to villages faster than ever.

So I have a feeling that the gold demand from India may peak in the next few years as the middle class moves away from it. So long term gold bulls better watch out.

Jul 11 11:24 PM