Melt It Like Beckham: Major Changes for the Indian 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?

“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”

 

From

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

The two new developments are as follows:

Melt and Trade

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 possible gold price-related headwind could be the news from yesterday 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)

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