A month ago, after causing a spike in cotton prices following the imposition of an export ban, India promptly overturned said surprising move following a surge in protest from not only various trade local groups, but more importantly China, whose already razor thin margins would become negative if input costs soared even further. The whole process lasted about 72 hours from beginning to end. Days after, desperate to fund ongoing budget shortfalls, the government shifted its attention to price controls in a market it knew China would absolutely not mind to having the price kept artificially low - gold. What happened then was an announcement by the government to impose to levy an excise duty on unbranded jewelry. The response was swift - a countrywide strike among India's jewellers who all went dark, crippling demand from one of the traditionally strongest gold markets in the world. And all this happening at a time when the wedding season is at its peak, with Akshaya Tritiya, one of the biggest gold buying festivals later in the month, making the period crucial for jewellers. As of hours ago, the Indian finance ministry has caved, and while it took three days to end the cotton export ban, it took three weeks to end the excise duty proposal, India's Finance Minister Pranab Mukherjee said that the government would consider scrapping a budget proposal to levy an excise duty on unbranded jewellery. The result will be three weeks of pent up demand for precious metals being unleashed suddenly, likely pushing spot gold far higher, to where it would be had this latest artificial price control never been established.
More from Reuters:
"The strike has been called off today onwards. We will be starting our shops from tomorrow," said Kumar Jain, vice chairman of the Mumbai Jewellers Association.
Jain said the strike would resume on May 11 if the tax rollback does not materialise.
The strike was staged to protest against an excise levy on unbranded jewellery of 0.3 percent, and a tax collected at source on transactions worth more than 200,000 rupees. The annual budget also doubled import duty on gold to 4 percent.
The moves were game-changers for the $200 billion a year jewellery industry and experts had predicted they could cut gold imports by a third to 655 tonnes in 2012, allowing China to overtake India as the biggest gold importer.
The strike by jewellers resulted in a loss of 200 billion rupees, according to industry officials.
That is not quite correct: the loss will now become a disproportionate profit, as demand for gold, which never really left, but merely could not be satisfied, comes back with a vengeance. Think cash for clunkers inverted. The other impact will be a surge in gold imports, which in turn pushes demand for any kind of gold, paper and physical, rapidly higher.
Keep an eye on gold futures when they open for trading later this afternoon.