Can’t keep Indians from their gold

In 2011 Indian’s imported a record 969 tons of gold.  Imports have more than doubled since 2008.

In India gold is still seen as money and is commonly purchased for savings. According to the All India Gems & Jewellery Trade Federation  “In a country like India, there is no scheme for social security, and investment in gold is like social security.”

As the rupee weakens and the country’s current account deficit grows, 80% is attributed to gold imports, the Indian government is trying a number of methods to reduce demand. But try as they might, they can’t seem to keep Indians from their gold.

The Indian government has been considering ‘gold linked’ investments to ease demand for physical gold.

Last month The Hindu reported  “Attributing the surge in gold imports to the high current account deficit, the government on Monday said it was considering schemes such as gold deposits, accumulation plans, gold-linked accounts, and pension products to curb demand for the precious metal.”

Indian Today says the “RBI also recommended that banks should design innovative financial instruments that can provide real returns to investors and wean them away from gold.”

 

GATA’s Chriss Powell has been very critical of India’s proposed ‘gold linked’ investment products.

“But of course investing in a merely ‘gold-backed’ product is actually a mechanism for forfeiting the benefits, by nullifying the price support that otherwise would be given by one’s own investment. … The real objection of the Indian government here seems to be that the Indian people have control of the better wealth-preservation mechanism, the metal, and the government is stuck with the inferior wealth-preservation mechanism, the rupee.”

In addition to providing ‘paper’ alternatives, the Indian government is considering higher taxes on gold. The Indian Finance Minister has recently said “We may be left with no choice but to make it a little more expensive to import gold,”

The speculation  is that the tax will be raised from 4% to 6%. This is on top of last year’s doubling of the tax on purchases of gold bars and coins.

It seems that the government has been partially successful as gold imports in 2012 were down slightly, however, the World Gold Council estimates that imports jumped 9% to 223 tons in the third quarter.

India’s demand for gold, not just for jewelry, but for investment and trade, is not lost on suppliers. Valcambi is planning to introduce its very cool “CombiBar” in India. “The CombiBar, gold bars the size of a credit card that can easily be broken into one gram pieces and used as payment in an emergency,could be a hit in India, the world’s largest consumer of gold where the precious metal has long served as a parallel currency.”

It is a safe bet that the Indian government will continue to raising taxes, attempt to divert demand, etc., but I can’t imagine that they will be very successful.

As Zerohedge  put it… “India’s ever more aggressive attempts to curb gold as a monetary equivalent will simply force the population to hoard ever more gold, result in even greater gold imports, both using legal and less than legal means, but most importantly, lead to a surge in the gold black market as the government’s more explicit intervention in the definition of what is and isn’t money forces more and more Indians to seek the safety of the yellow metal in ever greater numbers.”

 

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