Indian Gold Ban Put to Bed

A couple of weeks back we reported on India banning large denomination notes (here).  Whilst generally originally being accepted by most voters as it was ostensibly about stamping out ‘black money’ the move is starting to cause more widespread panic in India and some of the more hysterical conclusions even globally.  As reportedly 60% of notes have not been handed in the government has been upping the ante to move things along, now with a shorter deadline to get them into a bank and the threat of a penalty tax on deposits considered too large to be legitimate.  

The more concerning rumours were around gold being banned for citizens.  The theory is that the black money is just being converted to gold.  That this rumour emanates from the world’s second biggest consumer certainly caused consternation in markets.  When asked we have maintained a very strong view this would never happen given Indian’s very deep seeded and cultural need to hold gold.  The uproar and cost of political capital would be devastating.  Indeed a top finance ministry source has just categorically put it to rest saying:

"There is no such proposal before the government on restricting domestic gold holding,"

The Indian government’s battle with gold is nothing new.  In 2013 we saw layers of restrictions introduced to curtail imports as it was worsening the Indian balance of trade (gold is second to only oil as an import).  Modi has actually wound some of this back since taking power and given his political opposition has now turned against him on the cash ban there is little chance he would change tact.

The other thing that we are now seeing too is rising premiums paid over the spot price which in itself is a positive sign of surging gold demand.