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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.

  • Sambaran says:

    I read somewhere that gold is the biggest, longest running ponzi scheme across all the geos, through all the ages. It is really mind boggling.
    It seems gold buying is bad for country’s finances. However, I cannot think of any short term measure to reduce the gold-craze. So the country must take the gold-punch for now, if we do not want to encourage smuggling and make criminals out of normal people.

  • Amit M says:

    What’s the breakup? Is most of the gold being consumed as jewellery? Or bars and coins?
    Jewellery, well, that’s an age-old thing, driven by societal pressure and tradition. Most people believe that you can’t have enough (especially during the wedding season) and every occasion (a new birth in the family, or a birthday) is a good excuse to buy some gold. All the women in the family notice what the other women at a wedding were wearing. (Not being sexist here, just speaking from experience, having been forced to listen through several ‘post-wedding dissections’.)
    Past few years, we’ve also had the good excuse of ‘gold is a good investment!’ for people to buy more. (Of course what happens when you try to sell that ‘investment’ when it’s in the form of ornaments is a different story.)
    So, naturally when the price dropped, people were going to go crazy. I had to field a lot of ‘why don’t we buy now, prices are so low’, and ‘this is the best time to get me a pair of gold earrings, prices are down!’ over the past few weeks! 🙂
    Reducing gold consumption is going to be a real toughie. Drop the price, people buy. Raise the price, people will still buy thinking it’s going to go higher.

  • lohit says:

    Might be just a ‘bull trap’ and return to normal thing – http://en.wikipedia.org/wiki/File:Stages_of_a_bubble.png
    We have seen this before. Eventually the exuberance goes away. “After the ecstasy the laundry’.

  • PrAvEen says:

    In South India the new marriage season starts in April after a huge gap of 3-4 months. So may be wedding shopping may had happened in April & that too when gold crashed some guys may bought it beforehand anticipating a raise

  • Krish says:

    I have been buying physical gold (jewellary) for the last 3 years especially on occassions of Akshaya Tritiya and Dewali (twice each year) for self consumption.
    Certainly lower prices this year tempted me to buy double the quantity. As I never bothered for investment, I bought more because of the attractive price. It is not with the gold alone, I have always bought more with any items (gadgets, garments and groceries) that offered good discounts.
    By the way, there was one branded jewellary got opened in the country that I live and there was a que to enter the shop. Never seen anything like this before. Got a salesman attention after waiting for 30 min inside the shop and it took nearly 30 min for billing. At this pace, no doubt that Jewellers shall be looking to empty shelves sooner.
    Everyone be it policy makers, regulators, analysits and advisors caught the phenomenon by surprise. We need lot more research on behavioural investment theories for each asset class.

  • H Manatee says:

    Deepak,
    Why do you think the government does not allow NRI’s to bring unlimited tax-free gold into the country which would increase the domestic supply, as long as they don’t hoard it :-), wink wink, hence the government does not need to import that amount spending the precious foreign reserves? Banning gold purchase will only incite smugglers in Dubai.
    People will buy gold one way or the other and there is nothing the government can do about it in the short term (it’s a free country, isn’t it?) but they might be forced to raid the bank lockers eventually if the S does HTF. What’s your view?
    People have sub-consciously learnt that government is fiddling with the Rupee, Year after year the purchasing power is being eroded away so why should the citizen gamble with his precious savings? I personally do not want to be part of this government sponsored scam in the name of “India shining”. It will be yet another “celtic tiger” in a couple of years.
    Other than buying petrol is there any big reliance for India on the Dollar? Just ignore dollars and go for gold standard instead I say and do bilateral trade with petrol producing countries? I know there might be challenges in the short term but isn’t that the route we will eventually forced to take given how fragile dollar has been?
    Your views please.

    • We can’t do a rupee denominated trade because a) we have a stupid FEMA act and we don’t want to allow others to hold rupees and b) they don’t want rupees. So both ends of the equation has to change.
      Secondly, if you remove gold and oil we are okay. But like I’ve maintained, you can never remove gold and oil.
      Getting NRIs to bring in gold to sell is okay but if hte premise is that the govt pays forex for the gold then you are mistaken. The govt or the RBI pays nothing. It’s the dealers that buy dollars that traders use to buy gold. The dealers cannot buy dollars from the RBI. The dealers buy it in an open market. Sometimes the RBI sells or buys in the market, that’s all.

  • H Manatee says:

    Thanks Deepak. So, other minor imports aside, from the RBI perspective it’s mainly the oil that we need the forex for? Why in that case does Chidambaram lament at the notion of Indians buying more gold? Is it because Rupee has to compete against gold as money, risking the government dominion over its people? Why does RBI not like the gold dealers buying dollars in the OM?
    Sorry, too many questions. Just curious to find out the nuts and bolts of this.

    • Hmm…good questions. There’s nothing wrong with gold other than that it hits our external deficit (that is, the high demand for dollars) Chidambaram probalby doesn’t like it for that reason.
      Btw, Gold dealers can’t buy $ in the OM because there is really no OM – dollars have to be bought from Authorized Dealers, and those guys trade between each other. Anyone can buy a dollar INR future though.

  • H Manatee says:

    If the current rate of gold purchase by Indian household continues I think Chidambaram will order gold confiscation (FDR set a precedent back in 1933 in the US). But he will do it just so that that the confiscated gold can be brought back into the OM to reduce import pressure.
    He knows most of it is stuffed in the Public sector bank lockers anyways. Due to worsening CAD if India were to go for an IMF-bailout due to downgrade, IMF might demand India to take such measures as well just like how they arm-twisted Cyprus into submission to steal savers’ money (IMF is pure evil in my opinion).
    At least they might start with the non-jewellary gold (coins and bars) in exchange for below market exchange rate. Indians’ love for gold doesn’t show any signs of quenching. What other logical conclusion can one take from this impasse?
    For the record I am all for gold. Let them back rupee with something tangible other than government paper promise.