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Commentary

When Gold Prices Fall, India Doubles Gold Imports!

I had recently mentioned that the Gold price drop would cause the Indian Current Account Deficit to narrow, and even quantified the amount: (How Much do the Crude and Gold Price Crash Help India’s Current Account Deficit?)

Gold has fallen over 20% from the peak, but we should probably consider about 10% average fall from last year. Non-monetary gold imports were $38 billion in the first nine months of the year (RBI BOP Stats). This extrapolates to about $50 bn per year. A 10% saving on that gives us a saving of $5 bn.

That, it turns out, was utter bullshit.

In just the month of April, when prices fell, India went batshit insane and bought more gold. And not just one or two percent more gold. Indian consumers DOUBLED their gold purchases.

Says the WSJ:

Imports in April rose 10.9% from a year earlier to $41.95 billion. That was mainly because of a sharp increase in the imports of gold and silver–India imported $7.5 billion worth of gold and silver in the past month, compared with $3.1 billion in the year-earlier period.

Get this. The price of gold fell 10%, and we bought $4.4 billion more of the that and silver, eliminating the theoretically calculated savings of $5bn for the entire year ahead. Even if this was reactionary buying – the first “I don’t want to miss the train this time” kind of reaction – it offsets what could have been a useful saving in the whole year.

Strangely the rupee rose all through April and it is when this news broke that it crashed to 55 to a USD yesterday.

The demand for gold is “inelastic”, it seems, or whatever the term is in economic for something that has increased demand when the prices go up, and like it turns out, has even higher demand when it goes down. It could be that demand comes back to normal levels after a few months if prices stay low, but we’ve pretty much lost the saving for this year.

How can you reduce the amount of gold the country’s population wants to buy? For this, you need to commission a study of mammoth proportions, to find out why people buy gold instead of, for instance, putting money in the bank. Since it’s apparent we think 10% inflation is “normal” it is unlikely that any of the simple and obvious answers are acceptable, so we will find other reasons for our gold purchases.

  • It was so hot in April, people went to airconditioned gold shops. (Proposal: ban air conditioners in gold shops)
  • Gold is being smuggled in from cheaper countries (Spend ridiculous sums of money enforcing border patrolling)
  • Foreigners are selling Gold to Indians so that our current account deficit worsens. (Force foreigners to register themselves as Foreign Gold Accounts before they can sell to Indians requiring a certification from RBI which will take at least five years)
  • The Congress (or the BJP) is importing Gold by the truckload just to fund the next elections.

I volunteer to be paid for such a survey (since I already have most of the juicy and acceptable answers), on only one condition: Just pay me in Gold.

Disclosure: Long Gold.

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