Can you control gold demand? Pt I
Following our release of the ‘Full guide to Nazi gold and currency war’, we’ve received a lot of comments that refer to legal gold confiscation by governments and authorities.
Whilst there is little doubt that the Nazi looting during the Second World War was brutal and done with undue force, our readers were quick to remind us of the equally immoral legal looting and controls put in place by governments over the years.
When discussing, or indeed Googling, ‘gold controls’ two things happen: the Google News section brings you tales of India’s latest clamp down on gold bullion investment and the search results return results looking at the infamous 1933 gold confiscation in the US.
But these weren’t the only ones and so in a new series of quick looks at governments’ attempts to control gold, we bring you some of the lesser known as well as the well known examples.
We start with the most topical: India.
Controls in India are a source of worry for many gold commentators, particularly those in the mainstream media. When predicting the end of the gold bull-market, government and the RBI’s efforts to clamp down on gold imports are frequently cited as a contributing factor.
However, as we explain below, controls are nothing new to the older generations of the most populous country on earth.
Why are there gold controls?
The country currently has a high inflation rate, low interest rates and a financial system which does more for the state than the people. Savers have no incentive to save in rupees, so they buy gold. But it is this gold, not the monetary system, which is, according to the RBI a source of a big problem.
Gold contributed nearly 30 per cent of trade deficit during 2009-10 to 2011-12, which is significantly higher than 20 per cent during 2006-07 to 2008-09. The large gold imports, thus, have led to major concerns in the macroeconomic management.
In April and May the trade deficit increased by $38 billion, from the previous year, this has been attributed to a 90% increase in gold and silver imports.
Interestingly, China, the country set to overtake India as the largest importer of gold, has the opposite of a current account deficit.
Restrictions in place:
– Import duty of 8% on all imports, it was 4% at the beginning of the year when the finance minister appealed to investors to stop buying gold.
– 20% of gold imported be earmarked for export. This gold is held in a bonded warehouse, once 75% of it has been exported more may be imported.
How long will they remain in place?
Who knows, it depends on the balance between reducing the current account deficit and managing the growing rate of gold smuggling.
Smuggling rates during previous controls were high, in 2011 an MCX report stated:
The Gold Control Act of 1962 also forbade private holding of gold bars. With local production of less than two tons from two small mines, Bharat and Hutti, together with recycling, the main demand was met by smuggling from the regional markets of Dubai, Singapore, and Hong Kong, usually as ten tola bars, uniquely preferred in India. The smuggling was a highly professional business, involving up to 200 tons, encouraged by a premium of 30 per cent over the London price. Over 3,000 tons has entered India unofficially since 1947.
Liberalisation of the gold market in 1997 was attributed to concerns over smuggling as well as that ‘the interest of consumers had been realised and efforts were made to integrate the gold market with financial markets.’
It appears this integration has not been successful enough for the government’s liking.
Is this the first time they have controlled gold?
No, the second half of the twentieth century saw several attempts made to control the gold market. Each one was unsuccessful either because of low uptake or illegal gold acitivities.
– In 1947 gold bullion imports and exports were banned under the Foreign Exchange Regulation Act, this was lifted in 1966.
– In November 1962, 15 year gold bonds were issued at 6.5% in an attempt to mobilise privately held gold. This only saw an estimated 16 tonnes exchanged for bonds. A small percentage of the total holdings.
– Further efforts at mobilising gold continued between 1962 and 1993. Each was disappointing in regard to how much gold was mobilised.
– In 1968 the Gold Control Act was implemented which forbid the holding of gold bars and restricted families’ jewellery holdings. This was abolished in 1990.
– In 1977 the government considered controlling the market in an attempt to stop smuggling. According to the MCX this idea was seen as an impossibility due to foreign exchange reserves. Instead, the confiscated gold was sold in small quantities through the RBI, ‘however, it did not have any major impact on smuggling.’
Have they tried to offer alternatives?
Many suggest ‘gold-backed’ savings products, but being backed by unallocated bullion the low take-up shows that these do not appeal to the gold-loving nature of the population.
The World Gold Council also work closely with Indian institutions to encourage gold-savings accounts, alongside other gold products.
Jim Rickards has suggested that rather than fight gold imports, they should embrace them for what they are – money. He suggests that the government reclassify gold imports as monetary assets, rather than as a commodity import, thereby relieving the pressure on the current account deficit.
Will this work?
In a country where the savings rate is high and half of this is in gold, one wonders how the investment sentiment can ever be changed.
Truth is, it can’t be. Smuggling figures last year were around 10% of all gold imported, that was prior to the 80/20 import rule. Now daily reports of smuggling appear in local newspapers. Premiums continue to meet new highs and supply fails to meet demand.
Nothing shouts ‘GOLD IS MONEY’ like a government confiscation and control scheme. Many describe India’s love for gold as ‘irrational’ but nothing is irrational about choosing one currency over another when it comes to wealth protection. Until the government are able to offer a currency which cannot be inflated and devalued, and bank accounts where citizens feel safe storing their money, there will be this fight by citizens to keep buying gold bullion.
Recent history suggests that this nation who are estimated to hold more gold than any central bank in the world will not be dissuaded from this trusted and treasured safe-haven.
Jan invites gold investors from around the world to join her for a Google+ Hangout Wednesday 7th August 2013, 20:00 UK time to discuss the findings and key takeaways from her latest research
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