Three weeks ago it became clear that in its fight to curb consumer thirst for gold products, India, whose population is the largest single source of gold consumer demand (at least for now, soon to be replaced with China) is losing said fight, after its finance minister made it very clear that "demand for gold must be moderated" leading to a hike in import taxes to 4%. Needless to say, there is no more certain way to increase demand for a given commodity (or gun, ahem US government) than to hint that the government will make its procurement problematic. Sure enough India blamed its record current account deficit on precisely this: the soaring imports of gold as locals revert to a currency far more appreciated and respected than paper, a topic further explained when we showed the exponential surge in gold-backed loans outstanding in India. Indeed, at least in this country, there is one safe and abundant collateral product which, contrary to the US, is as good as money - gold - whose consumer demand in just India and China is shown in the chart below.
Combined India and China consumer amount to some 35% of total gold demand, and 55% for just jewelry. And while we have tracked the relentless gold gross import surge into China, we have not done the same with India, because we assumed these were implied.
It is precisely the importing of gold that India is once again doing its best to curb, this time by boosting import duties on gold dore bars by a 150% from 2% to 5%, a day after it once again hiked gold import taxes, this time by 50% from 4% to 6%.
India more than doubled the import duty on gold dore bars and ores on Tuesday, hard on the heels of a hike in taxes on refined gold, as the government tries to curb demand in the world's biggest importer of bullion and rein in a record current account deficit.
India, whose gold imports total about 800 tonnes a year, hiked the import duty on gold dore bars to 5 percent from 2 percent. Dore, an alloy of gold and silver that is used by refineries to produce pure gold, accounts for about 100 tonnes of annual imports.
The move came one day after the government increased import tax on gold to 6 percent from 4 percent, aiming at closing the gap on import duties on bullion bars and dore, which had become an attractive import since last year after the government hiked tax on gold imports to 4 percent.
"It was a duty arbitrage that they have plugged," said Shekhar Bhandari, executive vice president of treasury at Kotak Mahindra Bank. "Otherwise people would not import through normal channels but import dore bars."
"There won't be much impact. Dore imports will increase day by day. The difference of one percent will attract refiners," said Harmesh Arora, director with the Bombay Bullion Association, a trade body.
Arora said refiners have been trying to tap small miners in Ghana, Kenya and other African countries for dore bars
Gold mines often process their gold-bearing ore on site and send dore bars to gold refineries to be processed into tradeable bars of high purity at 99.5 percent gold content or more.
"If there is 700 tonnes of imports for the Indian market, this can be totally converted into dore market," said Arora.
India's total annual gold consumption is about 900-1,000 tonnes and the difference is made up mostly from recycling.
Rising imports of gold have worried the government, which is battling a record high current account deficit. It is trying to curb gold imports to about $38 billion in the year to March 31, 2013, down from $58 billion a year earlier.
Ironically, while the ongoing piecemeal attempts to deal with the "current account imbalances" driven by the people's desire to park their money in real money will fail, what the government's intervention will do is force even more demand for gold in anticipation of even more government attempts to make procuring gold increasingly more difficult. But don't tell the BIS - for them this headline is nothing more than what it implies superficially, and thus, a good reason to sell gold.