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India surprised the gold market on Friday when it removed a fairly stringent restriction on gold imports, bringing a bright spot to an otherwise dreary gold market. The Reserve Bank of India issued a statement announcing the change on Friday afternoon, but did not give a reason for scrapping the import rule. Analysts have cautioned that the news may not give gold prices the boost investors are hoping for.
This article was originally published on Gold Investing News on November 28, 2014.
India surprised the gold market on Friday when it removed a fairly stringent restriction on gold imports, bringing a bright spot to an otherwise dreary gold market. The Reserve Bank of India issued a statement announcing the change on Friday afternoon, but did not give a reason for scrapping the import rule.
“It has been decided by the Government of India to withdraw the 20:80 scheme and restrictions placed on import of gold. Accordingly, all instructions issued about the scheme from time to time starting with A.P. (DIR Series) Circular No.25 dated August 14, 2013 stand withdrawn with immediate effect,” the bank said.
According to Reuters, the rule change comes as a surprise in light of recent talks between officials of the Mumbai-based central bank and the finance ministry in New Delhi; they had looked at increasing curbs on imports. A policymaker in India told the news outlet, “[w]e were not informed about the reason for scrapping this rule. The restrictions on who all can import who can’t are still valid.”
About the rule
India’s so-called 80:20 gold import rule was introduced in 2013. The restriction required traders to export 20 percent of all gold imported into India in an attempt to slow gold imports. That change sparked a rise in gold-smuggling activities, forcing gold consumers to resort to various extreme measures, “[f]rom getting human mules to swallow nuggets to hiding gold bars in dead cows,” Reuters states.
In that light, it’s unclear just how effective the mandate was. Bart Melek, head of commodity strategy at TD Securities, and Julian Jessop, chief global economist at Capital Economics, both told Kitco News that the import controls did little to curb Indian gold demand. Whether dropping the rule will reduce smuggling and up legal imports remains to be seen.
Not a game changer
The dropping of India’s gold restrictions is big news for the yellow metal, but analysts have cautioned that the news may not give gold prices the boost investors are hoping for. After all, India still tacks a duty of 10 percent onto all gold imports.
“On the margins it’s positive for gold but I don’t see it as a game changer,” Melek told Kitco. Similarly, Bernard Dahdah, precious metals specialist at Natixis, told the outlet that market watchers will need to see India’s import data in order to see how much of an impact the change really has on gold demand.
Certainly, the news did little to buoy the gold price on Friday — as of 1:34 p.m. EST, gold had lost $29.40 to trade at $1,167.20 per ounce. Dropping oil prices and a rising dollar continued to weigh on prices for the yellow metal, according to Bloomberg.
What’s next?
To be sure, investors and market watchers will be keeping watch to see what will replace the 80:20 rule. Though it’s too soon to tell what new rule the government will implement, or even if the government will put in a new restriction, one analyst has suggested that India’s government may opt for monthly or yearly quotas.
“Quota is a more logical and simple way of monitoring and limiting gold imports,” Thomson Reuters GFMS Senior Analyst Sudheesh Nambiath told Reuters.
Despite the lack of impact on the gold price, gold investors and market watchers will likely be cheered by the news, and will be keeping an eye on news from the Indian government.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.