Will India’s New Precious Metals Ban Affect the Price of Gold?

There has been plenty of strange economic news out of India since late November 2016, and the nation’s social media is abuzz with rumors about a possible ban on gold ownership. In fact, Prime Minister Modi has not banned gold outright, but has put several measures in place that are meant to combat the black market. Instead, his decision has sent world gold markets spinning.

Will the Price of Gold Go Down or Up?

There’s no telling for certain what PM Modi will do next, but his past actions reveal that he is the most “anti-gold” leader in the free world. If a ban on gold ownership in India were to go into effect, the global market would experience a glut of the metal like never before. The 700 tons of gold India citizens purchase each year would literally be dumped on the marketplace, almost certainly sending the per-ounce price well below the $1,000 mark, perhaps far below that mark.

What about the Black Market?

By all estimations, the Indian black market is one of the largest in the developed world and has been a thorn in the side of the nation’s economic planners for decades. Now, under an aggressive prime minister, the government has already banned the use of high-value paper notes as a way to fight money laundering. A gold ban by India’s government might have the effect of increased smuggling, so porous is the country’s border in many areas. Smuggling could assure a steady flow of gold to the citizenry, but at a much higher cost to buyers (smuggled goods always carry a heavy premium).

Sadly, because the situation is so volatile and many rumors persist, international media outlets are at a loss to say exactly what is going on in India, both officially and unofficially.

For investors in gold and other precious metals, Indian government policy is serious business. Not only does the nation import about 750 tons of gold each year for private ownership, but the new policies are thought to be already putting a damper on the flow of gold into India. Thompson Reuters estimates that India’s gold imports for 2017 could decrease by as much as 20 percent.

Here are some key facts about India’s current economic situation, many of which could affect the global price of gold and other precious metals.

  • There is already a hefty customs duty of 10 percent on gold brought into the country. This recent move by the government, along with a 1 percent excise tax on gold jewelry, was intended to decrease gold sales to the public. The actual result is that people began hoarding gold out of fear that the government was planning to ban it.
  • India’s current administration has publicly stated that their goal is to decrease private ownership of gold, an asset the socialist prime minister calls “non-productive.” He believes gold ownership of any kind is wasted capital, which is why many analysts think his high-denomination currency bans are just step-one of a gold ban.
  • Unlike most other developed nations, India imports an incredible amount of gold, primarily used as wedding gifts and personal investment. As of 2016, gold was among India’s top five imported goods, alongside oil and nuclear equipment.
  • Because India produces almost no gold of its own, the vast majority of the metal is imported. Traditionally, Indian citizens have maintained personal stashes of gold because they have little faith in the government’s economic soundness. All over the world, where governments are on shaky economic ground, citizens purchase gold as a hedge against financial catastrophe.
  • When Modi banned 1,000 and 500 rupee notes in November, many citizens panicked and immediately cashed the notes in at jewelry stores for gold bullion. Because Modi has a penchant for announcing economic edicts without warning, many of the nation’s serious economists warn that a gold ban could be just around the corner.
  • The minute the currency ban was announced, local gold prices in India began to rise, no doubt sparked by genuine fear that Modi was a loose cannon.
  • Economists believe that India’s economy is about 25 percent “underground,” and much of the money laundering takes place when criminals trade ill-gotten cash for gold bullion.
  • The price premium per ounce that Indians pay for gold has already surged to $12, the highest it’s been for more than two years. This premium jump, as opposed to previous ones, occurred overnight.
  • India’s social media is rife with rumors, which appear to be well-founded, that a gold ban is Modi’s next move. Indeed, the prestigious Indian Bullion and Jewelers Association (IBJA) has publicly announced that they believe a gold-ownership ban is imminent.
  • It is not known how an outright ban would affect the global pricing of other precious metals, particularly silver. There are reasons to believe that speculators who fear a severe drop in gold prices might switch their holdings into silver, which could mean a massive demand surge for the latter.

What Does This Mean for Silver and Gold Investors?

In international politics, especially Indian politics, nothing is certain, so all information coming out of India right now should be carefully scrutinized. But, Prime Minister Modi appears to be very serious about his economic goals, one of which is the dampening, or perhaps total banning, of private gold ownership.

Because of the nation’s unique appetite for the metal, and its huge import demand, Modi’s future actions could have severe and immediate impact on the price of gold, almost certainly in a downward direction.

That situation could lead to a spiral effect that eventually ensnares the prices of other precious metals on the global market, particularly in the U.S., China and Europe. Cheap gold could mean very, very expensive silver, platinum and palladium, as those metals become a sort of “substitute gold” in the face of a true gold glut.

There is no shortage of theories and “what if” scenarios among the world’s economists concerning a possible gold ban in India. The point for average investors is this:

  • Keep an eye on news out of India.
  • Be ready to sell gold if it appears that prices are ready to hit the skids.
  • Likewise, be prepared to acquire silver and other precious metals whose prices might be set to surge.

In the world of precious metals investing, political realities like national monetary policy changes can have a significant impact on prices across the board. The best approach for individuals is to stay informed and be ready to take appropriate action.

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