India’s Gold Demand Surges!

India is back in the gold market, and in a big way, too.

Now, we could chuckle at a potential pun about a golden elephant in the room. But this is serious.

This could be one of the big drivers for gold prices in 2017. Is India already priced in? Three words: No! Heck, no!

Here’s the scoop. The word on the street is that Indian gold imports have jumped 582% as jewelers stock up for anticipated festival demand. India is the world’s No. 2 consumer of gold, after China.

Bloomberg reports that India’s gold imports rose to 120.8 metric tons last month from a year earlier. That’s according to a "person familiar with provisional data from the finance ministry."

What a turn-around. Last year, India’s gold consumption fell 37% to hit the lowest level in seven years. And that, in turn, helped drive Asian gold demand down 22% in 2016. That’s according to Thompson Reuters GFMS.

Weakness in India and China explained 273t of the 347t drop in annual global jewelry demand in 2016. Image credit: World Gold Council

So what’s going on? India is just now recovering from last year’s chaos, when the government rolled out a series of measures to cut spending on gold.

First, India raised the tax on gold jewelry. That sparked a jewelers’ strike that started about a year ago, and lasted for three months.

In August, India also raised the import duty on gold to 10% from 8%. That led to wide-spread smuggling and a plunge in official imports.

Finally, in November, India’s government announced sudden "demonetization."

What does that mean? Large bills were outlawed. Abruptly, 86% of cash in circulation was no longer legal. Considering that 47% of Indians don’t have bank accounts, this was a recipe for pure chaos.

Demonetization was meant to stop corruption and terrorism. So they said, anyway. Citizens had to stand in lengthy lines to exchange their money. Cash simply ran out in some places. Several deaths were linked to the demonetization.

What it stopped was commerce. It took people a while to adjust, and few were interested in buying gold at that time. That suppressed gold buying until January.

The government made attacks against gold all of last year. And it definitely knocked gold imports lower.

India imported only 500 metric tons of gold last year. That’s much lower than previous years.

This year, the government hasn’t taken any further action against gold. And in February, the government slapped a 12.5% import duty on silver. Silver had become more popular as taxes rose on gold. Now, buyers are switching back to the yellow metal.

Realistically, India should see its gold imports rise by at least 200 metric tons, or 6,430,150 troy ounces. That would be on top of last year’s demand of 16,075,400 troy ounces. That is a HECK of a lot of gold.

So yeah, India’s resurgent demand could have a HUGE impact on global demand and prices.

A surge in Indian demand will come on top of all the other factors I’ve been telling you about. Peak global gold production. Rising investor demand, especially in physical ETFs. Geopolitical jitters. Rising inflation. And a new bullish cycle in gold itself.

To be sure, India’s government could attack the yellow metal again. But if it doesn’t this could be hugely bullish. The gold market doesn’t know it yet. But it has a tiger by the tail.

All the best,
Sean Brodrick

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Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit. Working on…