The Lesson Of India’s Gold Saga

The Indian rupee hit a record low yesterday. The Indian government’s efforts did not succeed to stop its decline. What’s more, bond yields surged to five-year highs driven by market forces. Reuters writes:
Efforts to prop up the currency, which has tumbled nearly 13 percent against the dollar this year, have thus far proved ineffective, making it the worst performer in emerging Asia and threatening to drive the region’s third-largest economy towards a full-blown crisis.
The long term chart of the Indian rupee says it all. Pay special attention to the evolution since the end of 2011 and particularly the last months of this year (courtesy:
Now in such an environment, people logically flee to physical gold. It is the only currency that people can own to protect against the debasement of their local currency. Indian citizens know this very well as they are the prime example of what is called “the love trade.”
Linked to their currency debasement is the growing current account deficit. In an attempt to solve this, the country issued several sanctions to discourage their currency flowing into gold. We described for instance in Indian Government Desperately Tries To Discourage Gold Demand several import taxes. More recently, Indian officials increased the gold import duty to 10%. Needless to say that gold imports have almost frozen in the past couple of weeks.
To put things into perspective, we are talking about the most important gold consumer in the world. Even with the continuing efforts from the government, the Q2 2013 figures show the strength of this love trade (chart courtesy:
The key point here is that one should logically expect an increased (almost instinctive) appetite for gold. Try to imagine being a citizen in India, with your local currency being debased to the extent shown above. In an attempt to turn to gold, locals could have sees an escape route by buying the metal abroad, right? Not really, because the next thing in the Indian saga is … capital controls. Via Bloomberg:
The RBI cut the amount local companies can invest overseas without seeking approval to 100 percent of their net worth, from 400 percent, according to a statement on Aug. 14. Residents can remit $75,000 a year versus the previous limit of $200,000.
The authority said banks accepting deposits after Aug. 24 from Indians living abroad need no longer keep 4 percent of the funds in cash and invest 23 percent in government-approved securities.
India also boosted import duties on bullion on Aug. 13 and banned inward shipments of gold in the form of coins and medallions to reduce the trade deficit. In a briefing in New Delhi on Aug. 14, Mayaram said imported gold must be stored in government-mandated warehouses.
What is the key take-away in this story? The gold price in Indian Rupee dropped in 2013 led by the world spot price. Indians, in the land of the love trade, considered this as an excellent buying opportunity. Their hunger to accumulate physical gold became insatiable. It was no coincidence that Indians have been fleeing to gold in a real rush (see pictures in this post). The government reacted by issuing a series of sanctions to deprive their citizens one of their basic rights, i.e. the protection of their financial health. And now they are even blocking them from looking abroad to buy the metal.

Source: Bullion Bulletin

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