India’s ‘War On Gold’ Ends

The world’s second most populous country has been making headlines in a big way the last couple of weeks.

For starters, India just concluded an historic election season earlier this month. With a population of over 1.2 billion people—almost a fifth of the world’s population—and a voter turnout of an estimated 553.8 million people, India’s 2014 election of Prime Minister Narendra Modi was the biggest exercise in democracy ever.

Modi, who is affiliated with the BJP (Bharatiya Janata Party), ran for office on a platform of economic development. In fact, even before news of his landslide win reached some remote corners of the large nation, BJP officials promised to invest in enough clean energy sources like solar and wind power to make sure every Indian household has at least one light bulb by 2019—a daunting goal for a country where some 400 million of its residents still lack basic electricity.

Last week, as the Indian market was trying to position itself for the change in leadership, there was good news for investors on the gold front as it was announced that India’s central bank, the Reserve Bank of India (RIB), is easing rules on gold imports by allowing several private agencies to ship and import physical gold into the country.

Officials said this move was aimed at addressing the growing problem of gold smuggling, reducing premiums, and encouraging demand in the peak of wedding season, when a majority of Indians buy physical gold as gifts.

Last year, India raised the duty on gold imports from 4% to a whopping 10%, and also mandated that 20% of imported gold be exported back out of the country (known as the 80/20 rule).

While there have not yet been changes to the 80/20 rule, the easing of restrictions has sparked something of a gold revitalization in India, as retailers and stockists become bullish off of the lower premiums. Other investors are now in a hurry to get rid of their physical metal assets before the selling rate drops even more.

Indian jewelers anticipate gold prices to get pulled down even more, and they are optimistic that the newly elected PM Modi and the BJP will take more gold-friendly steps in the future.

As the world’s second largest gold consumer, India plays a significant role in the global gold market. Higher demand for the yellow metal in India and other Asian countries like China has a direct affect on Western supply and market values here at home. No doubt, American investors and traders should keep a close eye on the East.

How do you think future Indian demand for gold will affect prices in the U.S. and Canada?

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