REFILE: Indian Gold Import Ban: Fact or Fiction?

Sunday November 27, 2016 15:03

(Kitco News) - Prime Minister Narendra Modi’s move to ban 500 and 1,000 rupee notes caught the country by surprise, with many Indians now looking to liquidate their stockpiles of cash. Internet chatter is now a flurry, with some wondering whether the government’s next step will be to ban gold imports and prevent Indians from cashing in “black” money.

"The Indian financial market is in chaos right now – India, like the U.S. and Germany have a lot of people who produce newsletters on the internet that are not necessarily based on fact but rather contain extreme theories and rumors." Jeff Christian, Managing Director, CPM Group

Nigam Arora, chief investment officer of the Arora Report, said he is taking the potential ban seriously. “We took this rumor seriously and incorporated it in our models that gave the sell signal in gold right after the U. S. presidential election,” he wrote in a MarketWatch commentary.

He warned that much of the media in the Western world is still oblivious to this major potential development ahead.

“The Indian Bullion & Jewellers Association has informed its members that they are hearing from certain circles of a potential ban on gold imports,” Arora said, adding that  social media in Asia is “abuzz with these rumors.”

He explained, “[T]he premium on gold being sold in India has jumped to $12 per ounce, the highest premium since November 2014. We see this jump in premium as tangible proof that the rumor is taking hold and affecting gold price.” Arora said that the real reason behind the current depression in the gold price is the situation in India and not talk of Trump’s infrastructure spending, which would be gold-price negative.

Arora explained that Indian imports are a huge deal. “On average, India imports about 700 tons of gold each year. This is an enormous quantity. An abrupt reduction in demand of this magnitude, if there is a ban on Indian imports, will be a major shock to the gold market,” he said.

“The most common method to convert black money into white money over the past 50 years has been too slowly buy gold by paying cash in large bills,” Arora said. “Now that large bills used to buy gold are worthless, demand for physical gold will decline.”

Frank Holmes, chief executive officer of U.S. Global Investors, thinks there may be something to the rumors. Holmes said that concerns over the potential gold import ban are prompting some Indian gold traders to place bulk, short-term orders of gold.

"The uncertainty in the Indian gold market, after the ban on high-denomination banknotes last week, is exacerbated by the threat of an import ban, and wild swings in the gold price are likely,” he said.

He added that Prime Minister Modi is taking a “big political gamble,” because of the upcoming elections next quarter in India.  “It is all a political maneuver, [Modi] vowed to go after corruption - he is a maverick politician like Trump.”   

And while Arora thinks if the ban should occur, gold could fall $200 an ounce on a given day, Holmes forecasts that it would be more along the lines of a potential $100 decline and then the metal should reset itself.

Holmes added that this would not mark the first time India initiates a gold ban. The country did so in 1968 and as Holmes explained, “it wasn’t sustainable.” ‘It’s an old movie being replayed – they had a gold ban before and they took it off because it didn’t work– gold is engrained in the psyche of the people.”

However, other industry experts and insiders think the gold ban rumors are just that -- rumors. 

“I don’t believe it,” Phil Newman, director of research firm Metals Focus, told Kitco News.  “[The rumors] seem to have been started by the market participants. Why they started? We don’t know.”

What is real is that there has been tremendous uncertainty in the gold and silver market in India, Newman said.  “When [the government] took out the notes, that caused huge problems for the trade and it hasn’t really recovered yet.”

Newman said he remains price positive despite weak gold demand during what should be a thriving wedding season in India, coupled with a lackluster market in China and the Middle East. “People are looking for the white knight of the physical market and it is hard to see where it is going to come from.”

A recent report from Business Standard echoed Newman’s opinion that demand for gold is at rock bottom even though marriage season has started in the country.

Jeff Christian, managing director of New York based firm CPM Group, agreed that the rupee note ban has thrown the Indian economy for a loop.

“The Indian financial market is in chaos right now – India, like the U.S. and Germany have a lot of people who produce newsletters on the internet that are not necessarily based on fact but rather contain extreme theories and rumors,” he told Kitco News.

Christian noted that Modi’s predecessor Manmohan Singh did the exact same thing, so the move to ban rupee notes is not unprecedented.

“The bizarre thing is, Modi is doing it two years after and we still have not received a good explanation as to why,” Christian said.

Modi’s move also follows similar action taken by the European Central Bank, which is discontinuing the use of 500-euro ($575) notes to stop their use in “illicit activities.”

The Reserve Bank of India will issue new currency notes of 2,000 rupees and 500 rupees.

Spot Gold on Kitco.com last traded at $1,189.40 an ounce, down $22.70 on the day.