ECN Capital Issues Important Trading Forecast on Gold

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( — July 17, 2017) — Aggregate gold demand is largely influenced by one country in particular, and it’s not China. India purchased approximately $300 billion of gold since 2007. Kotak Institutional Equities collected the data, and since 2008, the price of gold has increased by some 300%. Another interesting tidbit of information is that the boom period for gold occurred between 2008 and 2012. This makes sense given the widespread economic uncertainty that followed the global recession. During that time, the price of gold rose sharply and significant profits were being generated.

Since then however, gold prices have essentially flatlined. The occasional spike in the gold price has been followed by a sharp decline to keep prices in a relatively tight trading range. As is always the case with gold demand, numbers are higher when uncertainty prevails. In India, this is precisely what happened. Between 2010 and 2014, the total value of gold consumed in India was $190 billion, and the country imported $209 billion worth of gold. One of the most important changes to gold demand in India came from fiscal policy in the form of taxation.

How Is GST in India Impacting Global Gold Demand?

New rules on Goods and Services Tax (GST) rolled out on 1 July 2017. These new rules on GST were largely perceived to afford gold special status. Many experts recommended that the government of India impose an 18% tax on gold, however the government has maintained tax at just 3%. This bold tax initiative is designed to cut business taxes across the board, and it eliminates most every other form of tax for small, medium, and large businesses in the country. But the problem comes in when GST is applied to gold purchases.

ECN Capital expert Lionel Hendriks esq. believes that traders ought to consider the Indian paradigm in gold purchases: ‘…Prior to the implementation of the revised GST figure, the tax on gold purchases was just 1.2%. Now that figure has increased by 1.8% to 3%. Gold buyers are up in arms, and rightly so. With the huge volume of gold purchases made in India on a daily basis, increased taxation on the precious metal is a major disincentive to global demand.’ As such, this has facilitated the rise of a black-market industry in gold. Many gold buyers are now looking to smuggle gold into the country to avoid paying higher taxes on this investment. The current price of gold bullion is $1,219.77 per ounce (July 13, 2017). Over the past 6 months, the gold price has appreciated by 1.60%, or $19.20 per ounce.

How Big a Deal Is Gold Smuggling in the Indian Economy?

Smuggling has always been a major source of concern to India and many other countries where taxation and import duties play a part in overall demand. For example, during 2013, the Indian government increased import duties on gold to 10%. During 2016, it is estimated that some 120 metric tons of gold were smuggled into India, according to the World Gold Council. At today’s prices of approximately $35.344 million per ton, that translates into $42,413,457,000. This can significantly undermine accurate pricing on gold markets, since it effectively removes that limited supply from official tracking.

This begs the question: Is gold demand increasing or decreasing? Based on India’s policy of increased taxes on goods and services, the short-term impact of higher taxes is decreased demand. Naturally, the gold industry is going to be affected by higher costs, especially when the global economy is not quite as robust as it should be. As long as equities markets remain the flavor of the day, demand for gold will always be on the back burner. Since gold is a safe-haven asset, it tends to react negatively to positive GDP, NFP, positive consumer sentiment, etc.

Gold Demand Remains Extremely High In India

When there is geopolitical uncertainty, gold demand increases. However, gold will not perform well when increased taxes are levied on the precious metal. In India, gold is more than an investment for many people – it is a necessity. Most every class category in the country demands gold as part of a cultural norm; it is not the exclusive preserve of the well-heeled. The results of an ICE 360° survey indicate that some 87% of households in India own gold. It is interesting to point out that the price of gold in Indian rupees has appreciated the most on average (in percentage terms) between 2002 and 2017. The average gold price annual appreciation in INR is 12.5%, compared to 10.8% in USD, 9.2% in EUR, and 12% in GBP.