Indian Finance Minister Announces Cap On Gold Imports

Michael Teague |

On Wednesday, with better than expected economic data and the Federal Reserve tight-lipped about the inevitable reduction in its asset-purchasing program, the price of gold once again dropped, down 0.65 percent to $1,316.20 an ounce.

While investors in the US and Europe have for various reasons come to see yellow metal as a threat rather than a safeguard of value, the situation is quite the opposite in Asia, where the wealthy along with a rapidly growing middle class still fancy bullion as a repository for their money.

Nowhere is this more apparent than in India, the world’s largest democracy, as well as its largest consumer of bullion; in 2012, the country accounted for 20 percent of global demand.

But the Indian government has been taking measures to tamp down gold purchases, in a bid to recalibrate an enormous current-account deficit and preserve the value of its currency, the rupee. Already this year the government has doubled taxes on imports, an especially significant move considering that the country imports nearly all of the bullion purchased by its citizens

Then, on July 22nd the Reserve Bank of India forced importers to devote 20 percent of the gold they bring in to the country to jewelry exports, which has resulted in a premium of $10 per ounce over the spot price to what importers can charge jewelers.

On Wednesday, another measure was added to tame demand by capping the amount of gold that can be imported for the year at 845 metric tons. According to Finance Minister Palaniappan Chidambaram, the measures to limit imports of non-essential items will result in savings that are otherwise spent on foreign exchange, and suggested that more steps could be taken in this direction if necessary.

Thus, gold could be losing its best customer at what would appear to be the worst possible moment, as the metal has taken a thorough and almost shocking drubbing in 2013, with investors increasingly piling in to equities.

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