India has always been a mysterious yet magical place for every investor in gold. There is an obvious love-hate relationship where consumers love gold, but as a lot of gold gets imported into India, an account deficit is created which is something the government doesn't really like. That’s also the main reason why the Indian government has always tried to reduce the demand for gold even though it’s a major monetary asset and every country would be happy with its population buying gold for different reasons than distrusting the country’s currency.
The problem is obviously that the government’s official policy to curb the imports of gold is incredibly inefficient. The Indians love gold and will try to get their hands on the yellow shiny stuff no matter what. By limiting the amounts of officially imported gold, the government is actually indirectly encouraging smuggling as Indians don’t seem to be holding back on buying gold despite the official regulations.
A new regulatory framework could be very interesting for the country and its citizens as some kind of middle ground will need to be found to keep both parts of the equation happy. In a survey whereby 5,000 Indians were asked about their opinion about gold, a big majority answered that they would continue to buy gold, in good times and in bad times so an import restriction isn’t really having a deterring effect. Moreover, in the era when the government policy was quite loose, it actually benefited the most as the import duties brought in more cash.
As India is a country with a dramatic difference between the demand for gold and the domestic production of gold (see previous image), something will need to happen and that will have to happen sooner rather than later. According to the World Gold Council the solution isn’t to restrict the import of gold even further, but to find a way to use the gold more efficiently in the country’s economy. For instance, several of the 5,000 respondents in the survey have indicated that if their bank would pay interest if they would deposit their gold, they would seriously consider to do so. But that can’t really happen as long as banks aren’t allowed to count their gold as a part of their liquidity reserves, and this also immediately closes the door for Indian banks to create new gold-derivative products, such as gold-backed bonds or other gold-backed investment securities.
Gold won’t really be abandoned by Indian households neither. In its survey, the World Gold Council asked what the respondent’s reaction would be if the gold price would go up and the results are astonishing. As you can see on the next chart, the majority would either do nothing or buy even more gold, and only a tiny fraction (6.4%) would consider selling gold.
Would the effect of bringing gold inside the financial system have a big effect? Absolutely. The most recent estimates are guesstimating that the total value of gold in the Indian economy is not less than 1 trillion dollars. This basically means that the majority of the Indian’s net worth is invested in gold (and granted, rich Indians will obviously have much more gold which will skew the ratio a bit). If only 10% of the gold would be used in the financial system, the 100 billion dollar windfall could have huge implications for both the economy and the government revenues. The best way to realize this, is if banks would be allowed to let their clients deposit gold and be able to draw down cash, backed by their gold in the banks’ safe. This would increase the available purchasing power to the average Indian consumer thus increasing the consumption rate and fueling the entire GDP of the country.
One final chart will impress you. The total value of the gold in India is estimated to be around $1T, as experts are estimating Indian households to own in excess of 700 million ounces. The total GDP of the country is ‘just’ $1.9T. If only 10% of the gold would be used to increase consumer spending, the effect on the country’s GDP would be enormous.
By effectively limiting the free trade in gold, the Indian government is also limiting the economic growth of the country. We’d dare to go even a bit further than the World Gold Council and think that the gold policy could be changed and used by the Indian government to regulate a certain and consistent GDP growth. In tough times the government could ease the regulatory hurdles for gold to fuel the domestic consumption, whilst in prosperous times where the economy is buoyant, the gold trades could become more restricted.
No comments:
Post a Comment