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How India’s war on gold backfired

by Frik Els | October 4, 2013 | Reprinted by permission of

Over the past year and a half P. Chidambaram, India’s finance minister, has been fighting his country’s insatiable appetite for gold.

The world has watched him plead, scold and lecture Indians—especially bankers—on the importance of not importing excessive amounts of the yellow metal.

The roughly 3.5 million workers of India’s gold sector have suffered under a raft of measures that have damaged the trade immensely.

Gold import duties have risen tenfold—from 1% at the start of 2012 to 10% today. Excise duties now stand at 9% while new transaction taxes and new rules, including one that requires cash payments for imports, have stymied India’s gold industry.

It follows that when the government tries to dissuade you from buying gold, it is surely a pretty good time to do just that.—A report from
gold broker Sharps Pixley

On top of all this, gold traders and jewellery manufacturers have to contend with record gold prices in the local currency, which has plunged to record lows against the U.S. dollar this year.

London-based gold broker Sharps Pixley estimates that the value of Indians’ gold holdings of more than 18,000 tonnes has suffered a $294-billion decline as a result of the anti-gold campaign, “and for no discernible effect.”

Sharps Pixley stated:

This is to say that this policy has manifestly failed for one good reason. It is self-defeating. With inflation remaining high, economic growth stalling and the domestic currency in free-fall, it follows that when the government tries to dissuade you from buying gold, it is surely a pretty good time to do just that.”

Indians know this instinctively. After all, gold was designed as a safeguard against precisely the difficult economic environment that India now faces. The more stringent the rules, the more keenly they will be circumvented.

Despite the best efforts of the government to wean rural India off gold, demand continues to rise. For Indian farmers, gold is the medium for holding savings between harvests, with rupees less useful—not least because there are just 36,000 bank branches to cater for 650,000 villages.

For Indian farmers (and for the 10 million weddings held each year) gold retains both its close cultural and financial link going back to the early days of the old Silk Road.

Sharps Pixley predicts that, despite all this, Indian imports are expected to reach 350 tonnes to 400 tonnes in the April to June 2013 period, 200% higher than a year earlier, nearly half of last year’s total.

For 2013 Sharps Pixley forecasts Indian gold demand will achieve a record 1,000 tonnes.

Download the in-depth report—Gold: Silk Road Redux—on how gold’s centre of gravity is inexorably shifting east.

Reprinted by permission of

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