India is one of the world’s primary gold buyers. Culturally and financially the yellow metal is a key part of the people’s psyche, and India often ranks at the top of all nations in imports of gold. 1 While the government’s demonetization policy caused a decrease in gold buying last year, analysts expect gold demand to increase soon.
Demonetization
The Indian government recently took aggressive steps to restructure the economy and limit black market transactions. They voided the old currency and replaced it with newly printed notes. Indian residents were required to turn in the old notes before they lost their value. All 500 and 1,000 rupee notes were made invalid unless exchanged for new 500 and 2,000 rupee notes.
The goal of the effort was to gain more control over the shadow economy that limits the country’s tax base and ability to implement effective monetary policy. The dip in demand for gold was driven in part by the closing of major jewelry stores as tax authorities were on watch for efforts to swap currency and gold within the provided 50-day window.
The government’s radical currency policy came after a decidedly lukewarm public reaction to a gold deposit scheme introduced to lure gold owners to use the banking system. Launched in late 2015, the program offered families and temples the opportunity to deposit gold and receive interest payments. However, the cultural hurdles and complexity of the program resulted in only 6 tons placed on deposit.
Gold Demand
One outcome of the demonetization policy was that cash-strapped Indians held off on gold purchases in late 2016. Total demand dropped by 21 percent, or to 675 tons from the 857 tons in 2015. According to the World Gold Council, the demonetization efforts also caused a shift in the number of high-value jewelry deals normal to Indian businesses.
Combined with the 7 percent dip in demand for gold from China, the impact on the market was evident in Q4 2016. However, even with the pullback in short-term demand from these countries, the price of gold has performed well this year and is on track to show solid increases.
Gold Buying to Increase
Interestingly, the unanticipated currency invalidation may well spur new demand for gold by Indian consumers over the long term. A spokesman for the WGC notes, “We are confident that the government’s move towards a more transparent gold market will ensure that gold remains an important asset class for millions of people in India.”
With the wedding season at hand and the currency issue slowly coming to a head, indications are that gold is again taking its rightful place in Indian financial priorities. When this renewed demand is felt in the market it will prove bullish for more upward movement in gold prices.