Why has India, after trying everything under the sun to get its citizens to stop buying gold, taken it to a whole new level? As of this moment, it is illegal for Indian citizens to buy gold coins or medallions, if they are not already in India. So why would a country do something like this? Well the simple answer is that India’s citizens love gold, and they feel more comfortable putting their money into gold than they do into the currency of their own country. So instead of India trying to improve their economy to attract more citizens to hold Rupees, they took the easy way out, as government often does, and they decided to penalize anyone importing gold into the country. First they tried a 1% import tax back in Dec of 2011. That didn’t work. Then they raised it up a bit more, and that didn’t work. And currently they have raised the import tax up to 8%, and that’s not working. So what do governments do when something is not working…they do more of the same (as we know). So the latest move by the Indian government is that they have suddenly declared it illegal to import ANY and ALL gold coins or medallions into the country! I kid you not. And if this doesn’t work, I shudder to think what the Indian government might do to its citizens if they don’t stop this stupid love affair with gold.
So as fascinating as this story may be, the question that we need to answer as investors is “how might the continued attempts by the Indian government to curb its citizens’ love of gold (or hate of the Rupee) affect the future price of gold?” And the answer is not that easy to come up with.
On one hand, we could look at the price of gold since India has attempted to curb its people from buying it and say that it has been bad for gold. After all, since December of 2011, when India began its import tax scheme, gold has dropped almost 23%, but it’s hard to say how much of that drop was a result of India’s efforts. Remember, although Indians love gold, India as a country only owns about 558 tons of gold which is miniscule compared to the overall market. To put things in perspective, the United States hold over 8100 tons of gold, Germany has almost 3400 tons and even the Netherlands holds more gold than India, so on a pure supply/demand curve, I don’t see India having much of an effect on the global price of gold.
However, from a psychological perspective, I think there is something that works in gold’s favor and may actually help its attempt to recover, which has been happening since late June. So here’s something to think about; considering pure human nature, the best way to increase the desire for anything is to tell people they can’t have it! And given the record high levels of distrust in governments around the world, gold may continue to respond very well to its almost forbidden status, not only in India, but around the globe.
Only time will tell, but keep in mind, since June 27th, gold is up about 14% and countries like India, who refuse to strengthen their economy and instead try to manipulate their currency to create the illusion of a stronger economy, might be a welcome friend to the price of gold.
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