What happens if governments try to solve a problem by suppression? Very simple, they appear to solve one problem but create another one further down the road. Case in point: Indian’s gold demand.
India has been the biggest gold market for many years. Now that could slightly change in 2013. The World Gold Council’s managing director for investment, Marcus Grubb, said this week that ”China will probably be the world’s biggest gold consumer this year for the first time on an annual basis. That will be driven by both jewellery and investment demand. Jewellery will be the biggest overall demand segment, but investment will grow fastest.”
One of the reasons this could change is government intervention in the local gold market. We have reported the continuing interventions here and here. In addition, the graph below (courtesy of WSJ) shows the tax increases on gold imports in the last 18 months.
For sure that these measures lead to a drop in gold demand. At least, in the official market. The WSJ writes: “The measures are having an effect. Gold imports declined 11% to 859.7 tons in 2012 from 969 tons in 2011. And the total for June fell about 80% to 30 tons from 162 tons in May, according to a trade ministry official.”
Obviously there is drawback to this. Indian people know why they should own gold. It is not an “exotic” practice to hold physical gold as the thinking goes in the Western hemisphere. In fact, as WSJ notes, “gold is the preferred form of savings for farmers.” The managing director of the World Gold Council’s India office adds to that: ”We have always maintained that there is a very innate demand for gold in India. Trying to manage this demand, which is so diversified, by restricting supply will lead to undesirable consequences.”
That is exactly what is happening right now in India. ”Smuggling of gold seems to be increasing month on month, said a senior official in the Department of Revenue Intelligence, a part of the Finance Ministry that combats tax evasion. It is mostly coming from Dubai but also from Bangkok and Singapore. The official said some of the gold comes by sea, but it also is being smuggled across land borders with Bangladesh and Nepal.”
Here are couple of interesting figures from the same article:
The value of the gold seized during the quarter was 270 million rupees.
That is more than 10 times the 25 million rupees of precious metal retrieved from smugglers one year earlier.
The total number of cases of smuggled gold rose to 205 from 21 a year earlier.
A Revenue Intelligence official admits that only about 5% to 10% of the gold smuggling in the country can be detected
Source :Bullion Bulletin