Guest Post: What Is Happening With Gold In India?

Tyler Durden's picture


Submitted by Jayant Bhandari,

Indian government has imposed a duty of ~11.3% on gold imports. Additionally, they have created bureaucratic complexities, including a requirement from gold importers to export 20% of their imports. The government claims that this has resulted in a serious drop in imports, something they wanted, given consistently high, unsustainable current-account deficits.

As I write this, international spot price of gold is $1,300 per ounce. In India, however, it is trading at a premium of 18%, at a price of $1,534. One might ask who is pocketing this premium. Has import really come to a stand-still? Let me explain the ground realities.

Recently, I arrived in the Indian city of Chennai from Singapore. My bag was missing, which had nothing of commercial value—just my clothes. The airline had me fill out a missing-bag form. When I went to a custom official to get the document signed, he asked me to pay a custom duty on the claimed value of my clothes. He didn’t want to understand that the fact that my bag did not arrive made no difference to whether they were dutiable or not.

Every Indian public servant I have ever met creates a situation to ask for a bribe. The result is that there are all sorts of leakages in any regulatory enforcement. Indeed, most regulations exist for the sole purpose of creating justifications for them to ask for bribes.

Before the 90s, import of gold was heavily regulated and carried massive custom duty. Of course, those days most gold arrived in India through smuggling. A big mafia had built up in Mumbai and Dubai, mostly catering to India’s gold demand. Two things happened as a result: Government lost all prospects of earning revenue from gold imports, and most importantly, smugglers ran a ruthless empire in several Indian cities, particularly in Mumbai, controlling human-trafficking (with horrible consequences for poor girls and children), and financing the real-estate and the film industries. They were the unofficial rulers of Mumbai. When restrictions on gold were eased in early 90s under pressure from IMF, the same smugglers took the shape of what got to be known as terrorists. (All this should not sound strange to those who understand the history of prohibition in the US).

The current restriction and heavy custom duty on gold will repeat the consequences of the era before the 90s. But really in an irrational world where rhetoric has more value, who cares about the real consequences? Indeed, based on my many conversations with traders, all gold that India needs is already coming through smuggling. And smugglers want restrictions on gold imports to stay in place—they haven’t had it this easy for a long time.

Indian government’s restrictions on gold will ultimately—after a gestation period—have only a minor impact on the price. Indeed gold will eventually trade in the Indian market for less than the official landed cost, for smugglers don’t have to pay the hefty custom duty. My guess is that gold will eventually trade at a premium of ~5% over the international price, having already fallen from 24% when the restrictions were imposed to the current 18%. Government will indeed lose whatever revenue it was getting from custom duty. As a secondary consequence, this will destroy wealth by creating more bureaucracy, mafia and terrorism. Most ironically, this will worsen India’s current account deficit, by motivating people to travel abroad merely to bring back gold.

Contrary to what the government claims, gold is easily available in the market, at a very thin, almost non-existent ask-bid spread, a sign of a very liquid gold market.   

So while I am not concerned about government’s interference in the gold market, except for its entertainment value, there is something else happening that one must keep an eye on, something that might negatively affect consumption of gold in India.

Indian currency has fallen by 30% over the last three years. Inflation is chronic, currently at ~10%.

Indians desperately need a hedge against inflation. Unfortunately, Indians have very limited options.  There are strict limitations on holding foreign currency, let alone foreign properties and investments. Given sustained high inflation and an extremely difficult investment environment within India, Indians invest a very large part of their savings in physical assets (property and precious metals), about 12% of GDP. Indians love gold and will likely do so for a foreseeable future. Moreover, gold has done quite well for Indians—it is currently trading not too far from its highest ever price in the local currency.

Could economic growth reign in on inflation?

India’s GDP per capita is a mere $1,491. Growth rate has fallen to ~4.5%, with the low-hanging fruit now having been picked over the last few high-growth years. Given a very difficult investment environment, it is not easy to invest in wealth-generating businesses. The new generation of Indians coming to the work-force are not trained for the modern economy. Despite that 10 million people join the workforce each year, there has been hardly any increase in absolute net employment over the last five years. What would have been a demographic dividend is rapidly becoming a liability. India is stagnating. Current account deficit today stands at >$80 billion, about 4.9% of GDP.

Could one off devaluation help?

Unfortunately, bad infrastructure, bureaucracy, corruption, lack of industrial training, and lack of rule of law makes India a high-cost economy. India’s problems are structural in nature. Any devaluation will quickly feed back as inflation, after creating a boom and bust cycle in the export-side of the economy. The eventual result is that Indian currency will likely have to be continuously devalued. Most importantly, I see no hope for India to change soon, making it unlikely for it to get back on the path of growth. Even the much publicized anti-corruption movement has mostly been about more free-stuff, and gimmickries of this extra-ordinarily socialistic and hypocritical society.

Even though the falling Rupee will continue to make gold a very good way for Indians to save and hedge against inflation and devaluation, India will likely not be a force for gold to go up going forward in terms of the US dollar. A devaluation of Rupee or increase in international price of gold price will likely require Indians to allocate more of their earnings for gold. But as I show above, there is not much extra cash in India, given its stagnant economy. Any further increase in gold price in the international market will likely result in reduced gold consumption in Indian. Gold needs other markets to pick up the slack.

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Thu, 03/13/2014 - 19:59 | 4545772 prains
prains's picture

it's being melted down into giant nipples

Thu, 03/13/2014 - 20:09 | 4545797 Skateboarder
Skateboarder's picture

Step 1) Dump current rupee.
Step 2) Introduced gold-backed government rupee. 1-on-1 paper for coin exchange.
Step 3) Watch the news for Obie drawing a red line.

Thu, 03/13/2014 - 20:11 | 4545804 Groundhog Day
Groundhog Day's picture

obie is creating jobs at the red paint store.  I keep making money on sherwin williams everytime he speaks

Thu, 03/13/2014 - 22:04 | 4546192 National Blessing
National Blessing's picture

All the gold in the world will never make an Indian man look cool.  Bastards.

Thu, 03/13/2014 - 23:38 | 4546511 Rock On Roger
Rock On Roger's picture

Gold Shirt Man has a tunic way of stacking.


Stack On

Fri, 03/14/2014 - 00:26 | 4546621 Quus Ant
Quus Ant's picture

Only thing keeping me from pullng the trigger on a solid gold shirt is I want to know how it breathes. 

Is it like egyptian cotton?  Or polyester? 


Fri, 03/14/2014 - 08:46 | 4546763 Theosebes Goodfellow
Theosebes Goodfellow's picture

~"...I want to know how it breathes."~

1.) Heavier, much heavier than Egyptian cotton.

2.) Sweatier, much sweatier than polyester.

3.) Will never, ever make it back from the dry cleaners.

4.) Doesn't loose its shine.

5.) Looks all "blingy" after a walk in the rain.

6.) Don't try swimming in it.

7.) But interestingly enough, it's perfect for short "boating" trips.


Fri, 03/14/2014 - 09:12 | 4547331 Indian_Goldsmith
Indian_Goldsmith's picture

And I feel like a king wearing it. 

Gold! Bitches!




GOLD IMPORTS COMING DOWN? YEAH, right! Indians' hunger for gold is greater than Americans' hunger for junk food and other filth. 

Fri, 03/14/2014 - 10:37 | 4547836 prains
prains's picture

...and KG's = 1000's of grams folks LOL!!

Fri, 03/14/2014 - 01:55 | 4546753 Schmuck Raker
Schmuck Raker's picture

Why would you reply to Prains' comment and ignore his "giant gold nipples" argument?

Or were you just hoping for top billing for YOUR comment?

[I may be no better]

Thu, 03/13/2014 - 20:04 | 4545782 logicalman
logicalman's picture

Governments just hate honest exchange thet they can't skim.


Thu, 03/13/2014 - 20:14 | 4545812 Ignatius
Ignatius's picture

Who skims the international drug trade?  Same guys.

Rackets are as old as history.

Thu, 03/13/2014 - 20:05 | 4545787 Seasmoke
Seasmoke's picture

$1300 ???? When did you write this ?

Pretty soon you can write an article an spot price will go up $100 before you type the last word !!!

Thu, 03/13/2014 - 20:07 | 4545788 SilverIsMoney
Thu, 03/13/2014 - 20:10 | 4545798 logicalman
logicalman's picture

But when will Ag get back to 16:1? - that's the big question.

Thu, 03/13/2014 - 20:24 | 4545843 Alpha Monkey
Alpha Monkey's picture

Somehow, the word never comes to my mind.

Thu, 03/13/2014 - 20:48 | 4545920 SilverSavant
SilverSavant's picture

There are very simple reasons why the gold silver ratio will blow past 16 to 1 and get as far out of balance low as it did high.   5 to 1 is my guess. 

Thu, 03/13/2014 - 21:42 | 4546114 SilverDOG
SilverDOG's picture

USGS sure as hell reported such.

Silver to be extinct, in 20 yrs. 

Six years remain of that forecast, if anyone can find that report.

Aforementioned WW!!! will misguide majority.

Demand wil decrease with population.

That be MANiPUlaTION.

Fri, 03/14/2014 - 00:02 | 4546575 Rock On Roger
Rock On Roger's picture

There is an article in scientific american magazine sept 2010 called 'How much is left?' It refers to silver amongst other things. If I remember correctly, silver was supposed to be extinct by 2029 according to the article.

I would provide a link but I think you need to be a subscriber to read the article.



Stack On

Thu, 03/13/2014 - 20:10 | 4545799 Atomizer
Atomizer's picture

It's being leverage for the BRIC International currency exchange. Central Banking agency's who type in keyboard transactions have their underwear in knots. Creating free money out of thin air vs asset backed monetary system has become a 19th century war. Words of John Kerry. See thru the fog of deception. 

Thu, 03/13/2014 - 20:10 | 4545802 Groundhog Day
Groundhog Day's picture

Hey Jayant,

Please tell us about the massive speculative housing/land bubble and how it works in india.  Maybe that's the hedge against inflation....until it's not

Thu, 03/13/2014 - 20:12 | 4545806 jefferson32
jefferson32's picture

Tyler hasn't talked about the GOFO lately. I found updated charts, and interesting comments:

Can't help but understand that the end is near.

Thu, 03/13/2014 - 20:23 | 4545835 kaiserhoff
kaiserhoff's picture

Uh, Dude.  Gold futures are bunched up because of ZIRP.  There is no interest rate component in futures or options.  Look at your charts again, and see when this started.

PS  Hope you're right about fiat.

Thu, 03/13/2014 - 23:55 | 4546563 Atomizer
Atomizer's picture

Dude, it's BRIC against the IMF SDR. Dude, do you understand? 

Thu, 03/13/2014 - 20:15 | 4545815 Spungo
Spungo's picture

I'm so glad we  have zero inflation

Thu, 03/13/2014 - 20:40 | 4545825 robertocarlos
robertocarlos's picture

Is that the guy who officiated the Phoenix NASCAR race last week?

Edit: That guy should have an attractive young woman on each arm. Or at least a note that explains women love men with many govt bonds.

Thu, 03/13/2014 - 20:21 | 4545834 SDRII
SDRII's picture

Better questions


Will india mars probe make it

Who is sabotaging the naval vessels. Why

What was the strip search in nyc about

What was that American and Ukrainian Pmc boat doing offshore india

Who behind the mass graves push in Sri Lanka post port handover to the chinese



Thu, 03/13/2014 - 20:22 | 4545837 Stuck on Zero
Stuck on Zero's picture

Imagine what would happen if Indian had an honest, free-market economy.  With all the talent there they would dominate the economy of the world very quickly. 

Thu, 03/13/2014 - 20:22 | 4545840 Cacete de Ouro
Cacete de Ouro's picture

In India, some gold roads lead to Nagpur, and to Sree Padmanabhaswamy. The RBI has Nagpur, but they want Sree Padmanabhaswamy.

Thu, 03/13/2014 - 20:29 | 4545857 Tinky
Tinky's picture

"some gold roads lead to Nagpur", while others lead to Shoppers' Willage.

Thu, 03/13/2014 - 20:34 | 4545871 RaiZH
RaiZH's picture

Weddings are being effected, that is all.... sigh. 

Thu, 03/13/2014 - 20:35 | 4545873 gatorengineer
gatorengineer's picture

bringeth the Deer

I want the Deer

Where is the Damn Deer



Thu, 03/13/2014 - 20:35 | 4545876 robertocarlos
robertocarlos's picture

What is stopping India from going to a gold standard? The 900 million Indian people with no gold? Maybe it is too big a jump to go free-market at once.

Thu, 03/13/2014 - 20:44 | 4545910 Fred Hayek
Fred Hayek's picture

I love the ridiculous way the Indian government defines itself into a problem.

They give away a bunch of crappy rupees. In return they get back gold. And they tell themselves they have a problem. It's like financial hypochondria. And to solve their delusions of illness they want to attach many more leeches.

Thu, 03/13/2014 - 21:03 | 4545971 Manthong
Manthong's picture

Appreciate the insight… high entropy government.. pitiful, but understandable given the myopic clowns in charge..

India may make up with Ag demand (hedge substitute for gold and PV farm push) what it is diminishing in gold.

Thu, 03/13/2014 - 21:04 | 4545974 robertocarlos
robertocarlos's picture

It's good to know where to expect corruption.

Thu, 03/13/2014 - 21:27 | 4546067 hairball48
hairball48's picture

What's to know? Corruption is like oxygen; it's everywhere.

Thu, 03/13/2014 - 21:39 | 4546104 Manthong
Manthong's picture

myopic clowns in charge..

"clowns to the left of me, jokers to the right, here I am..."

Thu, 03/13/2014 - 21:25 | 4546059 Argos
Argos's picture

Please, please, please stop using that photo of the ugly guy.  He makes gold look bad.

Thu, 03/13/2014 - 21:29 | 4546073 Ban KKiller
Ban KKiller's picture

The Indian knows history. So they buy gold. Chinese know too. 

Americans know what is on TV tonight. Everynight. 

Notice how it goes in the rest of the world but it can't happen "here"?

Thu, 03/13/2014 - 21:40 | 4546109 Iam_Silverman
Iam_Silverman's picture

"So they buy gold. Chinese know too.  Americans know what is on TV tonight. Everynight."

Back in the day you could have both.  TV and gold, that is.

Solid Gold!

Thu, 03/13/2014 - 21:55 | 4546158 whoknoz
whoknoz's picture

so what happened to the lost bag?...and how much was the bribe?...was this written from the airport, waiting for the luggage, or from the laundramat, waiting for fresh underwear?...

Thu, 03/13/2014 - 21:59 | 4546173 Freddie
Freddie's picture

Damn that shirt would like really good on me.   I would feel proud wearing it to my gig at the phone room in Mumbai. 

I would feel immense pride when helping people with a greeting like "How may I be helping you sir?"

Thu, 03/13/2014 - 22:48 | 4546330 Soul Glow
Soul Glow's picture

It's $1370.

Gold bitchez

Fri, 03/14/2014 - 02:41 | 4546792 Kriya144
Kriya144's picture

A rare article...  written as one man sees it from the ground...  presented as such.  Valuable in my opinion, that you Jayant Bhandari.  More like this please!  

Fri, 03/14/2014 - 02:44 | 4546793 Kriya144
Kriya144's picture

A rare article...  written as one man sees it from the ground...  presented as such.  Valuable in my opinion, thank you Jayant Bhandari.  More like this please ZH!  

Fri, 03/14/2014 - 04:58 | 4546869 Calculus99
Calculus99's picture

Nice article Jay, thanks.

Fri, 03/14/2014 - 17:10 | 4549765 monad
monad's picture

Microsoft sucks.

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