India is the world’s largest consumer of gold. Their gold imports increased 50% in 2011 to nearly 1,000 tons while they produced merely 2 tons. This extreme imbalance between production and consumption means that Indian consumers must buy gold on the global market. The net purchase of nearly 1,000 tons of gold over the last year has placed approximately $60 billion U.S. dollars worth of Indian Rupees on the foreign exchange market. The outflow of Rupees has forced the Indian government to take action to constrain domestic gold purchases as they rebalance their foreign reserves. This has placed their government at direct odds with the culture of their people.
The Indian government has raised taxes to reduce domestic consumption. First they’ve placed a 1% excise tax on all gold jewelry sales. This is in addition to varying the Value Added Tax (VAT) on a state-by-state basis. Secondly, they’ve separated investment quality gold bars and coins from nonstandard gold such as jewelry while simultaneously doubling the import duties on both. Investment quality gold is now taxed at 4% while jewelry, ornaments and other nonstandard gold pieces are now taxed at 10%.
Gold is a primary investment vehicle in the eyes of the Indian public. This is due to the low penetration of and distrust in the banking sector along with centuries of cultural coveting. Gold is given as gifts at weddings, births and religious festivals. Gold is also held as a means of savings, store of value and investment. It is estimated that the Indian public holds more than 18,000 tons of gold worth more than $800 billion U.S. Dollars. This is about twice the amount of gold in Fort Knox and about 25% of the combined holdings of all exchange traded gold funds.
The government’s implementation of these taxes has been met by a massive uproar among the people. The primary response was from the jewelry industry due to the direct financial implications these actions impose. They have implemented a strike against gold purchases over the last week. Industry estimates are that the jewelry industry is losing as much as $200,000,000 per day during this strike. The magnitude of this number reflects the trickle down economics of such a major industry. Shipments are not being handled at the docks. They are not being transported to manufacturing facilities. Smelting plants are not being run. Jewelry is not being manufactured and the inventory on the shelves is being sold at a premium. Meanwhile, employment hours are lost at each step in the process.
The drop in demand on the global market can be seen in the gold market’s decline over the last couple of weeks as this storm has brewed. Gold prices have declined by over 8% in the month of March. The strike is expected to last until March 22nd. I believe that once the strike is halted, we will see money move back into gold as Indian demand replaces a week’s worth of lost inventory.
Most of the decline in the gold market appears to have been small speculators forced out by the market’s decline. The Commitment of Traders data shows that March’s decline has forced out 25% of the speculative position. This is telling as commercial traders have stepped up to buy this drop in the market. The market may continue to head lower from here briefly. However, the typical pattern in a range bound market, which this is, is for small speculators to get too bullish on the way up and too bearish on the way down. This manic behavior plays right into the patient hands of the commercial traders who are buying this decline in the market.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
