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Gold Ban or Not, India’s Gold Market Will Shrink - Analyst

(Kitco News) - While the rumors of the Indian government imposing a gold ban appear to be more fiction than fact, one market researcher says that the government’s clampdown on the country’s underground economy and on “black money” will continue to take its toll on the gold market.

India's crackdown on the underground economy will reduce gold's luster according to Nigam Arora from the Arora ReportIn a recent interview with Kitco News, Nigam Arora, chief investment officer and founder of the Arora Report, said that as citizens become more confident in India’s financial system, the need for gold will be reduced. He added that the government policies already in place are helping to reduce gold’s role as a store of wealth.

India’s domestic gold market and global investors have been nervous since early-November as the rumors of the gold import ban started to spread after Prime Minister Narendra Modi announced that the government would end the use of 500 and 1,000 rupee notes.

However, over the weekend, government officials have been trying to limit the spread of the gold ban rumor. In an interview with the Economic Times, Commerce and Industry Minister Nirmala Sitharaman said that she supports the idea of “restriction free” gold imports to help cut down on smuggling.

Kitco News has reached out to representatives of the Indian government and the Ministry of Finance but has not received any official comment.

According to some analysts gold smuggling, if the government went through with a ban could be a major problem. Smuggling rose dramatically in 2014 when the Indian government tried to restrict gold imports by imposing an 80:20 rule, which stipulated that 20% of all imports had to be exported before companies could buy more gold. Two years ago, $150 million of smuggled gold was seized by Indian custom agents.  Arora said that he would expect any gold ban to be extremely “porous” and probably work against the government’s initiative to diminish the nation’s underground economy.

While an outright ban on gold doesn’t look likely, Arora said that there are other policies the government has implement that will reduce gold’s luster in India’s black market. For example, he said jewelers now have to keep a daily record of their gold inventories. 

Along with its ban on large denominations, the government is also looking at banning cash transaction more than 300,000 rupees. This could have a major impact on gold jewelry purchases. At the start of the year, the Modi government instigate a 1% tax on all cash purchase above 200,000 rupees. Arora said that almost 80% to 90% percent of gold is purchased with cash.

“If Modi continues with his current policies to curb ‘black’ money then gold demand will eventually fall,” he said.

Arora added that they have already seen a significant decline in investor interest in gold as an ultimate safe-haven.

“Back in 2007, we were telling our subscribers that 20% of your portfolio should be in physical gold. Now, we are saying that 3% to 5% of your portfolio should be in gold,” he said.

While there could be some backlash to the government’s latest efforts, Arora said that he has heard broad support across the country for Modi’s initiatives. He added that he also understands why there is a lot of support throughout the country because India needs a strong financial system in order to grow within the global economy.

“Most people don’t understand just how large India’s underground economy really is. It is massive. Modi’s policies are long overdue,” he said. “Every country has a black market but no country can progress with an underground economy as large as India’s.”

 

By Neils Christensen of Kitco News; nchristensen@kitco.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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