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Last Updated on: 26th April 2021, 08:20 pm
Last week, the Reserve Bank of India (RBI) placed new restrictions on the import and export of gold while the government of India doubled its tax on gold imports from 4 to 8 percent. The RBI’s new policy will make it mandatory for gold buyers in India, which is currently the world’s largest consumer of gold, to put aside 20 percent of re-exports for jewelry. This one-two punch from the RBI and Indian government is being sold by the mainstream financial media as “a bid to cut a record current-account deficit” which is currently 4.8 percent of India’s gross domestic product. However, there might be more behind these new policies.
The World's Largest Buyer Of Gold No More?
With these new restrictions and tax, India will probably lose its long-held title of the world’s largest gold consumer. China, which will most likely claim the title by the end of this year, has long been No. 2 to India for this distinction. There were predictions that China would overtake India this year prior to the new restrictions, but now it seems inevitable.
Prior to the RBI’s announcement, India’s gold imports were on pace to break last year’s mark. Through the first half of this year, India had imported 536 tons of gold whereas it imported 860 tons in 2012. While the titan firms of paper investments, such as Morgan Stanley, leaped with joy, publicly stating that demand in India could be reduced by up to 60 percent, no one is really for certain what effect these new policies will do to the gold market in India. There is obviously still a large demand for gold in India, but how will consumers react to the higher prices?
There is no such uncertainty in regards to China’s demand. On Thursday, the World Gold Council’s managing director for investment, Marcus Grubb, told Reuters that China could import an unbelievable 1,000 tons of gold this year. Naturally, that would set a new record for gold imports in one calendar year.
To see the shift in gold demand between India and China in the last three years, look at the map near the bottom of this page. It is quite astonishing.
India Could Be In Store For A Shocking Spike In Gold Prices
The decision to curb gold imports and exports comes at a peculiar time for many gold experts in and outside of India. While India and its citizens have always had a healthy appetite for gold, expert analysts in the gold trade are calling for an unprecedented spike in the price of gold in the country because of the timing of the announcement. India’s wedding season is less than two weeks away while numerous religious holidays, such as the ultra popular Diwali, are on the horizon. Gold jewelry, ornaments, and coins are popular gift-giving items for these celebrations. Referring to the possible lack of gold supply for the imminent wedding season, Vinod Hayagriv, the managing director of Bangalore-based jeweler C. Krishniah Chetty & Sons, told Reuters Wednesday “It’s going to be chaos.”
Reuters reported that “by tying gold imports directly to export volumes, India is effectively trying to cap how much bullion can be brought into the country, tightening supplies, and driving up local prices.” You can read the full article here. It's fair to speculate that the RBI and India's government could be attempting to drive up the price of gold right before what is traditionally the season with the largest gold sales.
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