In recent months, we’ve seen a big move in physical gold to India, as the economy has improved and gold demand has become much higher. Previous discussion about India’s banks moving to gold monetization has become a reality in recent weeks; Prime Minister Narendra Modi announced at the end of October that the plan could be ready in a matter of weeks. Gold monetization in India could have far-reaching effects on the world’s gold market. Here’s a look at what was involved in the change and how it could affect gold prices.
India’s Gold Monetization Movement
India’s gold monetization plan takes an unusual approach, allowing people who own gold to place it into banks to earn interest until withdrawn. This is different from the familiar tactic of the government, whose task is to mint precious metal coins and bullion. Instead of sitting in homes, gold is being circulated throughout the society. Because India is the world’s top bullion consumer at around 1,000 metric tons annually, it imports most of its gold from other countries. The new monetization scheme allows the gold to remain within the country to be reused instead of being imported. This will hopefully prevent a situation such as was seen in 2013, when the imports of gold created a $190 billion shortfall in their current account.
What India’s Gold Monetization Could Do to Gold Prices
Because exchange of gold sidesteps the related government involvement, it may prevent large purchases of the metal and may not affect worldwide gold prices too much, but there could be consequences depending on how much gold is required to be held in reserve versus selling it again to other buyers. If the original owners turn in their gold for a paper account, what happens if there is a financial crisis and they go to retrieve their gold only to find out that it has been sold to someone else? If a situation like that were to take place, people would probably return to physical gold, increasing the price of gold as the crisis develops and continues.
The other possible change it could make to gold prices involves the sheer amount of gold held by families in India, currently estimated at approximately 20,000 metric tons. If India’s new policy is very successful and it increases in-country sales of gold instead of importing the precious metal, the loss of demand from India could temporarily lower gold prices. With the abandonment of the 80:20 rule in India, gold imports have risen dramatically, inflating gold prices. At a minimum, the number of unknown factors in the entire scenario can leave gold prices volatile worldwide as investors learn how the new system will behave when meshed with the world’s gold markets and new policies.