How Will the Indian Gov’t Affect Gold Demand? – Metals Focus
Friday November 25, 2016 13:15
(Kitco News) - Analysts are looking for recent gold pressure to trigger physical demand, especially from gold-buying nations like India; however, according to one research firm, the Indian government's anti-money laundering efforts may actually curtail any bullion demand over the short term.
“2016 has been an extremely tough year for the Indian gold market, with regulatory changes and a protracted strike significantly impacting gold consumption. Our most recent data for India bears this out, with total Q3.16 gold demand of around 440t [tones], down 30% y/y,” a recent Metals Focus report said.
“To a large extent, this reflects the Modi government’s commitment of targeting undeclared money, not only in the gold market, but across the wider economy.”
Indian Prime Minister Narendra Modi has taken measures particularly aimed at increasing transparency in the gold market, which include announcing an excise duty, forcing gold buyers to declare any purchases over 200,000 Indian rupees as well as the most recent demonetization of high value Indian currency notes.
“Before this [recent] step was taken, the gold trade had been expecting much healthier Q4 sales, given a combination of lower gold prices and the onset of the festive and wedding season, both of which should have boosted sales,” Metals Focus analysts noted. “That said, October did benefit from strong demand. However, the clampdown has since dashed hopes that the October recovery would continue over the rest of Q4.”
What’s more, the analysts expect the jewelry business in India to remain under pressure over the next four to six months, “as consumers remain cautious in terms of their spending habits and also because of the potential for further action against undeclared money.”
“Metals Focus therefore estimates that the government’s clampdown may eventually see a permanent loss of some 100-150t of gold demand (annually) as undeclared holders look for alternative vehicles for their funds.”
However, over the longer term, the analysts said they could see the government’s efforts eventually helping the gold market.
“[I]t is also likely that a clampdown on undeclared money can positively affect the economy over the long term, particularly in terms of the benefit to per-capita income,” they wrote.
“As a result, in spite of the short- to medium-term impact on the country’s gold market, taking a longer-term perspective, the government’s stance is likely to benefit the gold industry.”