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Current Situation Since last August, the Indian government placed a stranglehold on gold imports into the country by requiring that 20% of all gold imported be exported as jewellery. This forced the amount of gold imported to drop to 30% of former levels until October of last year. Then the amount imported rose to 38 tonnes a month and has been at that level since then. The amount of gold that was expected to be imported for the year was north of 1,200 tonnes. It only achieved an imported total of 825 tonnes, around 400 tonnes less than expected. Lifting of restrictions If the Indian government eases these restrictions in the end March budget seven days ahead of the elections (and we expect they will), will it cause a jump in demand from the London market where India sources its gold fromsufficient to send the gold price soaring? It appears so, until we peer under the obvious at the basics. The reason the government gave was that it had to curb its Current Account Deficit, which has been part of the solution. It has since officially pared that deficit back substantially. To ease restriction at the end of March would gain votes for the government, so it has every incentive to do so. Smuggling Incentivized However, a simple easing-up on restrictions will not be sufficient to increase demand. The reason is the very high duties the government started to raise from the start of 2013. At a total of 15%, the duties on gold provide every incentive to smugglers to bring gold in illegally. Its guesstimated that 250 tonnes of gold are entering the country illegally and likely more. We guess this figure by the perceived shortages in the internal gold market there. At 250 tonnes of smuggling, there would be a shortfall on total imported volumes of gold on last years expected 1,200 tonnes of 150 tonnes. If the government dropped duties to 5% or less, the incentives to bring in gold illegally would fall dramatically. Would this stop smuggling? No, because the shortage of gold would persist. What it would do is to add a shortage premium to the gold price over and above legally imported golds prices that would ensure continued smuggling. Current Account Deficit not really dropping One advantage to the government in allowing the current restrictions to persist is that the costs of smuggled gold are not added to official figures when calculating the Current Account Deficit, giving the impression that it is dropping, when the reality is that it is not. But the second reality is that the restrictions are not keeping much more than 10% of demand for imported gold back. In itself this is a defeat for government. Hence, there is little point in maintaining restrictions on gold imports. Their political unpopularity must be weighed against the extra revenue the government is drawing in on the legally imported gold. With election beginning on April 7th we expect to see restrictions convincingly lifted so as to gain the most votes. How much volume of gold would then be imported and its impact on gold prices? What will that do to the volume of gold imports? We believe it would add a real total of between 150 tonnes and 200 tonnes of demand to the London market. Is this enough to boost prices? Ordinarily you would think not, but bear in mind the growing levels of total Asian demand and you see that the demand / supply levels are leaving the market tightly balanced. Rather like a see-saw tipping over even an extra 200 tonnes would add an extra 4 tonnes a week to current demand where global supply is around 84 tonnes a week. So, in itself, it would not have a dramatic impact, but in a balanced market, it would have a disproportionate impact, particularly when Indian and Chinese demand is growing constantly. If allowed to import all the gold wanted by Indian investors we may see 1,300 tonnes or more of demand from Indian investors in 2014. As it is we need extra supplies to cope with the rising demand, but theyre not coming at current price levels. Bear in mind that the 1,300 tonnes of extra supply from the U.S. last year appears to have dried up in 2014. It is against this background that we conclude: Yes, gold prices would be pushed higher by an easing of duties and restrictions on Indian gold imports, disproportionately more than the actual increase in the tonnage then imported! 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