Flooded By Gold Smuggling, India's New Cabinet Prepares To Lift Gold Capital Controls

Tyler Durden's picture

When one thinks India, the generic thing that comes to mind is the outcome of the recent historic election which saw the worst performance ever of the once unbeatable Gandhi family and the ascent of what many hope is a more pro-business regime (because as America itself has shown, hope and change sell). However, what perhaps should come to mind is something different: namely pent up demand for gold.

Recall that India is a country which, in order to keep its current account deficit at bay, instituted the most draconian gold capital control measures in history to prevent its population from taking refuge from scorching inflation and parking its fiat in gold. An incomplete summary of the measures taken in 2013 by India is summarized below.

  • Jan 21 - The government raises the gold import duty by 2% to 6%.
  • Jan 22 - The government more than doubles the duty on raw gold to 5%.
  • Jan 30 - Finance Minister P. Chidambaram says there are no plans for additional taxes or curbs on gold imports.
  • Feb 1 - The Reserve Bank of India (RBI) plans to introduce three or four gold-linked products in the next few months.
  • Feb 6 - The RBI says it would consider imposing value and quantity restrictions on gold imports by banks.
  • Feb 14 - The central bank relaxes rules on gold deposit schemes offered by banks by allowing lenders to offer the products with shorter maturities.
  • Feb 20 - The Trade Ministry recommends suspending cheaper gold jewellery imports from Thailand.
  • Feb 28 - India keeps its gold import duty unchanged in its annual national budget, defying industry expectations.
  • Feb 28 - India proposes a transaction tax of 0.01% on nonagricultural futures contracts, including for precious metals.
  • March 1 - The Finance Minister appeals to people not to buy so much gold.
  • March 18 - The Reserve Bank of India says it is examining banks that sell gold coins and wealth management products to identify "systemic issues", with a view to closing any legal loopholes.
  • April 2 - The Finance Ministry suggests it is unlikely to raise the import tax on gold further to avoid smuggling and would instead introduce inflation-indexed instruments.
  • May 3 - The RBI restricts the import of gold on a consignment basis by banks.
  • June 3 - The Finance Minister says India cannot afford high levels of gold imports and may review its import policy.
  • June 5 - India hikes the gold import duty by a third, to 8%.
  • June 21 - Reliance Capital halts gold sales and investments in its gold-backed funds.
  • June 24 - India's biggest jewellers' association asks members to stop selling gold bars and coins, about 35% of their business.
  • July 10 - India's jewellers announce they might continue a voluntary ban on sales of gold coins and bars for six months.
  • July 22 - The RBI moves to tighten gold imports again, making them dependent on export volumes, but offers relief to domestic sellers by lifting restrictions on credit deals.
  • July 31 - India hopes to contain gold imports well below the 845 tonnes that were shipped last year, the Finance Minister says.
  • Aug 13 - India hikes the import duty on gold for a third time in 2013, to 10%. Duties for silver and platinum are also increased to 10%. The customs duty on gold ore bars, ore, and concentrate are increased to 8% from 6%.
  • Aug 14 - India turns the screws on gold buying again, banning imports of coins and medallions and making domestic buyers pay cash.
  • Aug 29 -  India considers plan to allow commercial banks to buy gold direct from ordinary citizens
  • Sept 19 - India hikes import duty on gold jewerly to 15%

For better or worse, this attempt to crush popular demand for gold merely resulted in soaring and increasingly more ingenious attempts to smuggle gold into the country, which however do not register in the official data, and as such, the government no longer has an accurate perspective of what true capital flows look like.

However, the current regime of gold demand suppression may be ending soon, and all the demand for gold, pent up over the past year and likely amounting to billions of dollars, may soon bubble right back to the surface. Reuters reports that the Reserve Bank of India and finance ministry officials will recommend that the new government relax strict gold import rules to head off a surge in illegal buying, officials with direct knowledge of the plan said.

Because who could have possibly predicted that prohibiting legal means of obtaining gold would simply result in a surge in illegal ones?

The story, yet another one of a failed central-planning bank believing it could determine what India's vast population wanted to purchase is largely known:

Last year, India imposed restrictions on gold imports, the second biggest import after oil, following a steep rise in the country's current account deficit.

 

However, the curbs spurred smuggling into India, the world's biggest buyer, through illegal "hawala" channels, which are informal international networks for remitting money.

 

"We don't want to suppress demand artificially as it is creating hawala money. The longer you wait, the more will be such parallel channels," one of the officials said.

 

The incoming prime minister, Narendra Modi, who led the Bharatiya Janata Party (BJP) to a decisive victory in a just-concluded election, has indicated his willingness to remove the gold curbs. Modi will be sworn in on Monday and the plan to ease the curbs is ready for his government to take up.

 

"The next finance minister can sign the file on gold imports whenever he wants to sign it," one of the officials said.

 

The curbs would be removed in phases, the officials said. The RBI did not have immediate comment.

 

"Let the new finance minister take charge. Only then such issues can come up for a decision," said D.S. Malik, spokesman at the Ministry of Finance.

To be sure, the central bank can point to the current account numbers and claim success:

The current account deficit hit a record high of 4.8 percent of gross domestic product, or nearly $88 billion, in the fiscal year that ended in March 2013, pushing the rupee to a record low of 68.85 to the dollar in August.

 

The crackdown on gold imports helped trim the current account deficit to 0.9 percent of GDP in the December 2013 quarter, compared with a record 6.5 percent a year earlier, while the rupee has strengthened to 58.81.

What, however is not disclosed is how many billions in rupee were used to purchase gold illegally, which according to estimates was roughly 200 tons in 2013 (in addition to the legal imports of 825 tons in the same year), and thus left the country via unofficial pathways. It is this that should be most concerning to the RBI, as the central bank no longer has an accurate indication of what capital outflows it really is facing, having created with its actions an entire underground gold smuggling industry.

And sure enough, earlier the Reserve bank of India made the following announcement:

The Government of India and Reserve Bank of India has been receiving representations from the jewelers, bullion dealers, AD banks, and trade bodies to rationalise the guidelines for import of gold. Taking into account such representations and in consultation with the Government of India, it has been decided to modify the guidelines for import of Gold by the nominated banks / agencies / entities. These revised guidelines which will come into force with immediate effect are as under:

 

Star Trading Houses / Premier Trading Houses (STH/PTH) which are registered as nominated agencies by the Director General of Foreign Trade (DGFT) may now import gold under 20:80 scheme subject to the following conditions:

  1. The STH/PTH should have imported gold prior to the introduction of 20:80 scheme. STH / PTH should get the required verification done by the Department of Customs at any port where they have imported gold consignment in the past.
  2. The first lot of gold under this scheme would be based on the highest monthly import during any of the last 24 months prior to the RBI’s notification dated August 14, 2013, subject to a maximum of 2000 Kgs.
  3. As in the case of other nominated agencies, the eligible quantity may be imported by STH / PTHs from any port, subject to their eligibility limit / maximum quantity allowed to them.
  4. For proper compliance, before import, they must submit the import plan, port-wise and quantity-wise, to the concerned Customs office, where the verification of the figures of past performance was done. This information will be sent to all the other ports from which imports are permitted. The overall discipline of exporting 20% of each imported consignment before the next consignment is imported will be equally applicable to such STH/PTH importers.

Further, it has been decided to permit the nominated banks, to give Gold Metal Loans (GML) to domestic jewellery manufacturers  out of the eligible domestic import quota of 80% to the extent of GML outstanding in their books as on March 31, 2013.

So will India finally allow its population to once again purchase gold without limitations as it appears set on doing? And how will the price of gold react when the formerly largest buyer of gold is back on the bid and scramble to make up for one year of lost activity? We should know shortly, but one thing is certain: in the absence of private sector manipulation now that even the Gold Fixing cartel is imploding, the central bank manipulators, especially those at the BIS will have to work overtime in selling paper gold to compensate for what may well be a tsunami of pent up physical purchases out of the country with the 1.2 billion population.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ebworthen's picture

Finally.  Maybe my miners will catch a bid.

doomandbloom's picture

Gold, bitchez!

(havent used that in a while)

Arius's picture

in retrospective the expert advice was wrong!!!

 

it is human nature to want more what he/she is denied doesnt matter what it is drugs, booze or palladium ...

Oh regional Indian's picture

Very interesting to note that Modi is being compared to Nixon and this August 15th 2014 will be the 33rd anniversary of the slamming of the gold window by Nixon in 1971.

Something definitely seems primed to happen...

ori

THX 1178's picture

Het ORI do you have any PMs yourself?

CheapBastard's picture

WTF!? ... so my cousin Sameer Ranawat Ghandi Bhala Sidhartha "Johnny" Kumar [who works for that IT software telephone help center] didn't have to swallow those gold bars ?!

 

whatsinaname's picture

Why would Modi be compared to Nixon ? Which Prime Minister has kissed the earth on the way to his first session in Parliament ? He is a man of the Earth and hopefully be able to do for India what he did for Gujarat !!

I'd rather see him do a Jesse Ventura there (without some of the histrionics of course).

Larry Dallas's picture

43rd.

 

I guess not all Indians are good at the maths....:)

Cathartes Aura's picture

43 years on from 1971. . .

Uranus, the planet of sudden shifts, eccentric behaviours, upsets & systemic cracks. . . was moving between 10-14 degrees Libra. . .

Uranus takes about 84 years to orbit the Sun, and so we're about halfway from "1971" - 10-14 degrees Aries (opp. Libra in the Zodiac). . .

relationships (Libra) made back then (Nixon, China, gold) may find themselves under tension (Aries) as the Grand Cardinal Square (13-14dg) of last month shifts things around.

things fall apart, the centre cannot hold. . .

lakecity55's picture

Dudes, I have been loading up on Pd!

I think it will get to 1K$/oz before it's over.

I pulled a lot of $$ out of a low-performing Ag miner and put it in SWC.

Granted, it is paper, but it is in an actual producing entity. I feel for the muppets who bought Fuckbook.

I guess I'm a miner muppet (haha).

Alpo for Granny's picture

Fed may adjust inflation target higher because they did not hit their last one. Fucking idiots. Looks like i will have to move down from dog food to topsoil.

http://www.cnbc.com/id/101668496

 

wee-weed up's picture

The Norks recommend tree bark.

Alpo for Granny's picture

Thanks for the tip. I'll give it a try. Plus it may help granny's regularity problem..prunes have lost their punch.

FieldingMellish's picture

HaHa... miners bid... that's funny.

whatsinaname's picture

Modi's (new PM) home state of Gujarat suffered the most due to the gold import bans because a lot of fine jewellry work is done in Surat. Plus many gold traders are from Gujarat as well as major merchants. I can see the ban being lifted rather quickly now that NM is in the saddle.

 

StychoKiller's picture

If the Indian Govt. really wants to re-balance the trade numbers, why not just stop printing so many Rupees, thus lowering the demand for Au as a hedge against inflation?  It would be too much to ask I guess, for the Indian govt. to back the Rupee with Au...

Nawaralsaadi's picture

can't believe some names like Kinross are trading at a 12 years low!.

heavy.metal's picture

I stay away from miners. Miners are the weakest hand in the gold business. They have to sell no matter what!! And they keep selling at these ridiculously low prices.

Any smart gold holder would know this is the time to hold and add to your positions, not sell. Even if you're a strong hand, your miners are not!

Their leverage is their weakness. Don't be deluded by fake promises. Buy the real heavy and shiny thing, hold it tight. You will see the price go much lower before it jumps to its true market value. And you will see the miners go under, too.

 

rkbauer's picture

I live in Thailand where a lot of the smuggled gold from India goes through. Several years ago, most of the gold dealers were Chinese. But it seems like especially since the beginning of this decade, more Indian dealers are operating shops in Bangkok.

There was an article on www.investasian.com awhile ago saying how some of the major gold centers in Asia, specifically Hong Kong, Myanmar and Bangkok, were increasingly having Indian gold flow through them in the past few years and how illegal workers were coming in because of it. Maybe the new regulation will stop it.

Grande Tetons's picture

More demand. This sounds bad. 

Not sure if I should add a sarc tag to that one. 

Kaiser Sousa's picture

again, if u cant afford Gold...

u should be able to afford Silver...

bottom line...

JUST FUCKING BUY THEM.

fonzannoon's picture

Oil looks to be spiking just in time to jam everyone going on read trips right in the ass this weekend.

fonzannoon's picture

I actually meant read trips. I used to go on them when I was younger until I discovered road trips.

Grande Tetons's picture

I used to go on reef trips. 

mt paul's picture

i use to go 

on LSD trips

 

where the last thing to mater

was spelling ..

wmbz's picture

YEP! Just like clockwork each and every year!

Anasteus's picture

"the BIS will have to work overtime in selling paper gold to compensate for what may well be a tsunami of pent up physical purchases"

The problem is that suppression under such circumstances will just spur more and more new purchases, which will only result to myriads of thankful postcards sent from Indians to the BIS for giving them opportunity to buy physical at discount prices.

The suppression scheme only works when it can smash the sentiment, redirect focus away from gold to paper and eventually deter investors from buying physical. While the strategy is effective among western gamblers, the East is entirely different thing.

If India really were to liberate its gold market the BIS days would be numbered.

semperfi's picture

It means gold will go down by $50 the day of the lift.

heavy.metal's picture

Thanks for the tip. Time for some paper shorting, and after that trip to LCS to withdraw the profit at new discount prices.

 

SmittyinLA's picture

I figured our masters would wage war against Russia by suppressing gold and oil, so I closed my paper gold position and bought Gazprom.

When everybody gets on the same team one world govt, gold will come back, until them it's a tool for other than us.

 

 

JustObserving's picture

Perhaps, the NSA does not have dirt on the new government.  The NSA was collecting 13.5 billion pieces of intelligence a month from India - more than enough to blackmail most of its venal politicians.  Sonia Gandhi's son-in-law, Robert Vadra, allegedly made a 3,000,000% return on his investment in a decade.

250,000 gold workers lost their jobs when the Indian government imposed duties on gold,

Hope that will be reversed soon by Modi. 

Among the BRICS group of emerging nations, which featured quite high on the list of countries targeted by the secret surveillance programs of the U.S. National Security Agency (NSA) for collecting telephone data and internet records, India was the number one target of snooping by the American agency.

In the overall list of countries spied on by NSA programs, India stands at fifth place, with billions of pieces of information plucked from its telephone and internet networks just in 30 days.

The DNI spokesman chose not to respond to questions about how the NSA managed to pick so much data from India — 13.5 billion pieces of information in just one month — especially from its telephone networks, and about whether it had received the cooperation of Indian telecom companies.

http://www.thehindu.com/news/national/india-among-top-targets-of-spying-...

Zirpedge's picture

This is only QC oversite of the Indian telemarketers and answering services. 1 Billion cow worshipping vegetarians just arent that interesting, now move along.

BrosephStiglitz's picture

You more or less epitomize American hubris.  Are you an executive in BoA or something?

LawsofPhysics's picture

please do, and make margins 100% while you are at it.

q99x2's picture

Behold the "I" of the BRICS Jamie Dimon and die M'Fer.

Quinvarius's picture

China will remain the top gold buyer no matter how much India buys.  They ramped up too huge in the last year to be eclipsed.  Plus there are now established unrecordable blackmarket channels in India that will never go away.  They will always be able to deliver cheaper.  That is my opinion anyway.

Magnum's picture

Oh brother more fodder for the KingWorldNews cult who will no doubt first re-hash the "manipulation" story ad nauseum while at the same time looking at the "India Gold Smuggling Story" to tell everyone that gold will be $5000 by November.  zzzzzzz.

greatbeard's picture

Why read/listen to it?  Hell, I'm a bug and I don't listen to that non-sense.

ajax's picture

 

 

"How many Indian gold smugglers does it take to change a lightbulb?"

None, they can't get near the lightbulb for the fruit flies...

_SILENCER's picture

When one thinks India, the generic thing that comes to mind is the outcome of the recent historic election...

 

When I think India I think of people shitting in the streets and monkeys stealing shit out of your hotel room.

Hongcha's picture

I advised yesterday GLD and SLV were going to break support in this wedge ... then whipsawed myself by buying UGLD this afternoon.  Dumped for a small but stupid loss.  New lows for the move at least, and very possibly a re-test of $1180 in the offing, imvho.

asscannon101's picture

Not really germane to potential movements of the Indian government, but when you look at the Gold-Guy's picture used for the cover story here on ZH, it is important to note that Vlad Putin has those matching pants. Just sayin'...

sandblaster's picture

AU for the Hindu.

somecallmetimmah's picture

"...India attempted to centrally-plan and force a country of 1.2 billion to stop buying gold, going against centuries of, pardon the pun, tradition."

That's a 'pun'?

NoWayJose's picture

What's the duty on smuggled gold? Oh yeah, about the same as the US government collected on bootleg Whiskey during Prohibition...

If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.

SmittyinLA's picture

There's not much comparison between a 15% import tax and a 100% gold for fiat tax