Not a very golden time for gold in India

India’s demonetisation is hurting demand for the precious metal, which is the conventional asset choice to park unaccounted money.

Jewellery shops in Zaveri Bazaar, Mumbai, should be doing brisk business as the wedding season is in full flow. But there are few customers. Dhiraj Singh / Bloomberg
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India’s wedding season is in full flow and there should be brisk trade at this time of year in Zaveri Bazaar, the jewellery market in south Mumbai.

But the jewellery shops that line the chaotic, historic narrow streets are seeing customers only trickle in.

Kumar Jain, who owns a shop in the bazaar, laments the lack of trade, as he sips a cup of chai.

“My shop should have been heavily rushed,” he says, explaining that business is just 10 per cent of what he would expect it to be for this time of year.

After India earlier this month demonetised the highest value notes of 500 (Dh26.80) and 1,000 rupees in an effort to crack down on the widespread problem of black money, there has been a cash crunch amid limits on withdrawals and the amount of old notes that can be exchanged.

One customer in the shop, Shilpa Doshi, looks at designs for a gold kada, a type of bangle worn by men, that she wants to buy as a gift for her son’s wedding. She takes out a mass of gold chains from her bag.

“I don’t have cash, so I want to exchange,” she says.

Mr Jain says that most of the customers coming to his shop since the demonetisation move have been bringing their old gold with them to swap.

“She’s buying just 30 grams of gold but she should be buying 300 grams or 3 kilograms.”

What is most worrying for the gold trade in India, though, are the rumours that there could be a ban on gold imports, as India looks to further clean up its financial system. There have been no official comments on this and it is unclear whether such a ban is really being considered. But the rumours alone have been enough to rattle jewellers. Gold premiums have hit two-year highs as jewellers and traders have increased their purchases of gold amid concerns there will be a temporary ban on imports, according to Reuters.

“It is conservatively estimated that Indian households and institutions are the largest owners of gold and the money invested in the metal is mostly [financially] unproductive,” says Hareesh V, the research head at Geofin Comtrade. “So, there are high chances that our finance ministry may impose stringent measures on gold holdings and its transactions. Chances of banning gold imports or imposing restrictions are reasonably to be believed.”

In recent years, India has taken steps to try to curb imports of gold, including a series of hikes on import duties, because it weighs on the country’s current account deficit. Gold is largely an idle asset, so India has been trying to bring it into the formal financial system, with the launch of a sovereign gold bonds scheme, for example.

Mr Hareesh says that gold plays a significant role in India’s shadow economy.

“People having large amount of unaccounted money usually prefer to keep their holdings in different assets. Possessing gold in physical form has been largely seen among such people due to its special appeals like high liquidity, imperishability, easiness to keeping safe. It is very difficult to obstruct such cash inflows into the gold market under the absence of strict rules to tackle all gold transactions in the country.”

Anil Rego, the chief executive of Right Horizons, an investment advisory and wealth management firm, points out that increases in duties and taxes have fuelled intense levels of smuggling of gold into India.

“An import ban would just open the floodgates to illegal imports or smuggling,” he says. “Gold is considered a ‘safe haven’ and has value all over the globe. It is difficult, if not impossible, to precisely identify the source of gold held and the time of its purchase.”

Immediately following the announcement of the demonetisation of the notes by the prime minister, Narendra Modi, there was a rush to buy gold jewellery using 500 and 1,000 rupee notes before the ban came into effect at midnight that night.

In the days following the demonetisation move, many jewellers in India still accepted the scrapped bills.

One jeweller in Mumbai, who spoke on the condition of anonymity, admitted to accepting old notes and charging a 30 per cent premium on such purchases.

“The black sheep in the trade are unlawfully selling 10 grams gold for as much as 50,000 rupees against the present market price of 30,000 rupees,” says Himanshu Malik, the founder and chief executive of, an online jewellery portal. “Official business in the gold market has considerably slackened since implementation of demonetisation.”

Income tax officials have been clamping down on such sales and there have been a number of raids on stores by the tax department as reports of jewellers accepting the invalid notes emerged. Most jewellery shops in Delhi have been closed since November 11, after raids were carried out the previous day.

“For gold and jewellery, demand will reset to lower levels as investment demand will decline,” says Shekhar Bhandari, the senior executive vice president and head of global transaction banking and precious metals at Kotak Mahindra Bank.

“With demonetisation, households will now be more inclined towards financial savings. In addition, increased surveillance of gold jewellers by the income tax authorities will make them reluctant participants in ‘schemes’ that avoid disclosure of [tax identification numbers] for large purchases of gold and jewellery. Consumption of high-value items, especially jewellery, will get impacted as traditionally these have found favour as a store of unaccounted income or wealth.”

He thinks a move to ban gold imports completely is unlikely but says he would not be surprised to see the cash limit for jewellery purchases of 200,000 rupees brought down to 50,000 rupees.

“I expect businesses and households in the black and informal economy to have a serious rethink about their finances given the large psychological impact of the government’s recent demonetisation measure,” says Mr Bhandari.

Sunil Gupta, the managing partner of accountancy firm Sunil Ram and Co, based in Delhi, says that gold, like any consumer segment is bound to be affected by the cash crunch following demonetisation. But he does not see the demand for gold weakening for long, given Indians’ love of the metal and the fact that many Indians would be reluctant to hoard wealth in cash going forwards following the demonetisation move.

“The point to notice about the yellow metal market in India is that gold is a safe haven for many investors, including the retail investor who keeps gold as asset. While cash is the new unfavourable stock in the post-demonetisation period, people would park their money in other places.”

Mr Rego agrees that in the medium to long term, gold will continue to thrive in India and the “demonetisation drive may just add some additional sheen to the asset class”.

In the mean time, it appears that jewellers such as Mr Jain may continue to face challenging times, as least in the near future.

“Over the medium term, I expect all pains of the gold industry to recede,” says Mr Bhandari. “There will be some pain in the short term – but there is no gain without pain.”

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