The Indian gold market gets a fair amount of attention on this blog. And for good reason – as the global gold market’s biggest customer, what happens in India certainly doesn’t stay in India when it comes to gold. The impact of supply and demand means that trade in the precious metal in India has far reaching effects on the global gold price.
We’ve written before about the fluctuations of the gold price during the Indian festivals of Akshaya Tritiya and Diwali, and written about how important sales in the rural Indian economy are to trade.
But even these trends pale in comparison to the effect of the most recent developments in the Indian gold market.
In February, the Indian finance minister announced a range of proposals to revolutionise the way gold is traded across the country, as well as separate promises to drastically improve the incomes of those most likely to buy it.
Shortly after, the World Gold Council (WGC) published a report into the potential impact of these significant reforms. Here’s everything you need to know about what could happen next.
Background on the Indian gold market
As we’ve mentioned before, India has a strong cultural attachment to gold. Despite this, the Indian government hasn’t always encouraged its trade as well as other countries. In fact, back when the country first gained its independence, the purchase and manufacturing of gold were actually banned altogether.
The situation improved over the coming decades. Manufacturing gold under 14 karats was permitted, and private citizens were permitted to own gold again, but only up to a certain limit. This situation prevailed until the end of the 20th century.
Unfortunately, since 2012 government policies have moved back in the opposite direction. In a bid to regulate the country’s gold market once again, the government increased taxes on imported gold from 2 per cent all the way to 10 per cent. Needless to say, this had a significant effect on the price of gold, and has been connected to an increase in black market purchases and smuggling.
The next year, a further law was passed that decreed there must be an 80:20 ratio of gold bullion to jewellery imported, significantly distorting the supply chain.
New proposals signal a liberal market
The announcements in Finance Minister Arun Jaitley’s most recent budget suggest that things might start to move back in the right direction over the coming months and years. Of course, the proposals are no guarantee of anything – but it’s an encouraging signal that government attitudes towards the gold market are becoming more favourable.
Here are the three main changes that the government proposed:
- Establish gold as its own asset class.
- Create an efficient system to regulate gold exchanges.
- Re-establish the gold monetisation scheme (GMS).
There are some pretty complicated concepts here for even the seasoned gold market pro to get their head around, so let’s take a moment to break down what this means.
The policy that’s likely to have the greatest impact is the development of gold as its own asset class. This means the Indian state and its associated financial institutions will begin to consider gold as an asset in its own right.
This will mean that in legal terms, gold will be considered on par with fiat currency, bonds or stocks as a legitimate form of wealth. Changing the country’s financial infrastructure to recognise the potential for gold to create and secure wealth, allows the country to better create an integrated system of gold regulation.
If implemented properly, this has the potential to liberalise the gold market in India, and move much of business that currently happens on the black market into the legal market. It means that the gold market can start to reach its full potential, increasing the wealth of both the state and its private citizens.
What does this mean for the price of my gold coins and gold bars?
According to the WGC report, about a fifth of the world’s gold purchases are made in India. And that’s despite all the setbacks that the commodity has suffered. This means that an increase in gold sales across India is likely to have a wide reaching impact on the global gold price.
The WGC estimates that for each percentage point increase in the average income in India, the demand for gold worldwide also increases by 1 per cent. And alongside these proposals to make gold sales easier, the Indian government has also pledged to double the wages of Indian farmers by 2022. The rural economy makes up about two thirds of India’s gold market.
In short, these changes should make it easier to buy gold in India, alongside raising the living standards of a demographic very likely to buy it. In very simple terms, this package of reforms is highly likely to boost global demand for gold over the coming years.
How to make the most of these changes
If demand for global gold increases, by the laws of supply and demand, there’s a good chance that prices could rise accordingly. Of course, there’s no exact formula for these things, and other circumstances could well offset the trend. But with India having such a powerful effect on the global gold market, there’s every chance that things could begin to change over the coming months and years.
If you’re looking to get ahead of this trend, then make sure to have a look at our range of gold bars and gold coins. Stay tuned to our gold news if you want to find out about other crucial developments in the gold market.