The Legal Manipulation of India's War on Gold
By Staff News & Analysis - September 09, 2014

India prepares for shining return of gold demand … Festival season is kicking off in India – a period in which gold sales traditionally spike in the world's largest consumer market for the precious metal. This year investors are watching the key market particularly closely, following a period of muted demand when bourses have rallied and supply has been choked. The recently elected government of Prime Minister Narendra Modi surprised industry analysts by keeping import controls unchanged in its July maiden budget, in spite of an improvement in India's trade balance. At the same time, gold demand has become subdued in India, as domestic investors favour equity markets, which have risen 25 per cent in the past six months on hopes of renewed economic growth following Mr Modi's victory in May. – Financial Times

Dominant Social Theme: We would all be better off without this barbarous metal.

Free-Market Analysis: Last year, India's government made it harder and more expensive to import gold and this article in the Financial Times trumpets the success the government has had in its war on gold.

Because of India's insatiable demand for gold, the country's current account balance was ballooning. As imports continually outpaced exports, the world's currency marts pounded down the price of the rupee.

The idea then became that if gold imports could be curbed, the price of the rupee would rise again relative to other currencies. Hurray! This is apparently taking place, as the Wall Street Journal reports in a September article entitled, "India's Current-Account Deficit Narrows."

India's current-account deficit narrowed sharply in the last quarter as exports rebounded and government restrictions on the import of gold helped improve India's trade balance.

The deficit thinned to $7.8 billion, or 1.7% of gross domestic product, in the three months ended June 30, the Reserve Bank of India said Monday. That is sharply lower than the $21.8 billion deficit a year earlier.

Exports rose 10.6% to $81.7 billion during the quarter, compared with a 1.5% decline a year earlier. Imports fell 6.5% to $116.4 billion, thanks to a 57% fall in gold imports.

"Notably, non-gold imports recorded a modest rise of 1.3% as against decline of 0.6% in corresponding quarter of last year reflecting some revival in economic activity," the RBI said.

India's current-account deficit had touched an all-time high of 6.7% of GDP in the last quarter of 2012 and remained uncomfortably wide in the first half of 2013, dragging the rupee to a record-low. Both the RBI and the government have said that a current account deficit of up to 2.5% is acceptable.

But what's odd about this report is that gold smuggling into India has supposedly increased to between one and three tons per months. At the high end, this means that some 36 tons a year are being smuggled into India. A ton of gold at current prices is about US$40 million. This means that up to US$1.5 billion or more could be smuggled into India on an annualized basis.

The smuggling estimate comes from another Wall Street Journal article published in January 2014 and entitled, "India Plans to Keep Gold Import Curbs at Least Until March."

The paragraph in question reads: "[Finance Minister P. Chidambaram] Chidambaram said gold smuggling is estimated at 1-3 tons a month due to the import curbs, but added that the curbs are needed to keep control over the trade deficit."

The article goes on to add that, "The rise in India's gold smuggling is also creating problems for its neighbors. Last week, Pakistan imposed a temporary ban on gold imports to curb smuggling to India."

Please note these are government estimates and that Pakistan has supposedly banned gold imports (presumably at India's request) because of the smuggling problem.

What's the real amount? Double … triple? At 100 tons a year, the total smuggled volume would amount to some US$4 billion. That's a lot.

Also, please note, the previously quoted Journal article, above, states that India's deficit has thinned to $7.8 billion. But this doesn't take the smuggling into account.

And then there is this, from the Financial Times article:

"We have been saying for about a year now that gold is not what it used to be," says Swapnil Pawar, business head at Karvy Capital, the asset management and investment advisory group. Last year duties on the precious metal were raised to 10 per cent, and an "80-20" rule was introduced … "Demand is definitely picking up because of the festival season approaching but we don't see a big spurt in the demand," said Surendra Mehta, secretary of the India Bullion and Jewellers' Association. "Only the people who need gold are buying now, there are no investors."

How does Mehta explain the smuggling of tons of gold every month into India? This is such a significant problem that India's ruling Congress party chief Sonia Ghandi requested early this year that the gold restrictions be lifted.

The numbers being quoted regarding the gold supply and its diminishment are something of a fiction. True gold demand would force "white" prices up, but as it is, dealers can offer low prices and find ready customers, as there will always be a demand at reduced prices.

Of course, for every action there is a reaction. In this case, the reaction is that a suppression of the real gold/dollar ratio expands a backlog. The more price suppression, the longer the queue. If you want to figure out what's really going on in the gold market, find out how long it takes to get a physical order filled.

After Thoughts

India's price suppression has shown us once more the breadth of (legal) market manipulation and price misinformation. As if we needed more evidence …

Posted in Gold & Silver, STAFF NEWS & ANALYSIS
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