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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. So on the surface an easing of restrictions would have little impact on the gold price in London. Lifting of restrictions If, as we expect, the Indian government eases these restrictions in the end March budget, seven days ahead of the elections there, will it cause a jump in demand from the London market [where India sources its gold from] sufficient 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. It is 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 we work on the basis of these numbers. However, if we take the 38 tonnes a month and annualize that we get to 456 tonnes, which together with the 250 tonnes smuggled only takes total imported gold to 706 tonnes a 500 tonne shortfall on demand. 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 dropping so much 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 dropping anywhere near as much as reported by the government. But the second reality is that the restrictions are keeping around 40% of demand for imported gold back. In part 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 around 500 tonnes and of demand to the London market. Is this enough to boost prices? Oh, yes! Now add the growing levels of total Asian demand and you see that the demand / supply levels are going to tip to a deficit in terms of available gold [We do not consider all above ground gold as available]. Rather like a see-saw tipping over almost any additional demand will overwhelm supply, let alone an additional 500 tonnes. Supply has fallen by 1200 tonnes from 2013 [total estimated 5.500 tonnes] as U.S. sales have fallen away. So an amount of far less that 500 tonnes would have a disproportionate impact on the market, 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. Yes, gold prices would be pushed higher and likely much higher, by an easing of duties and restrictions on Indian gold imports! 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