Exclusive By Eric Dubin

The Reserve Bank of India has launched yet another round of measures aimed at restricting the country’s massive inflow of gold.  These efforts are foolish.   Addressing the country’s ballooning current account deficit and gold’s primary impact is rather straightforward.  If they reclassify gold imports as the importation of a monetary reserve, valued at prevailing market rates, rather than as the import (“purchase”) of a commodity, the current account deficit problem caused by gold would vanish.  The global central banking community probably would throw a fit.  But clearly, a reclassification would be in the best interests of India — even their oligarchs.


Love ad2 (1)

Jim Rickards first suggested this solution.  To the best of my knowledge, no one else has talked about this other than Rickards and myself.  Hopefully, others will start echoing this idea because it’s a simple and rational fix to an irrational problem.

The latest restrictions and potential fallout

Indian Banks will now have to hold 20% of all imported gold in a reserve for re-export.  The banks will only be able to import additional gold once they have exported at least 75% of the gold set aside in reserve.

Restrictions like these usually result in unintended consequences.  It might sound laughable at first, but it’s not out of the question that Chinese and Indian banks might collude to lubricate gold flow.   A Chinese bank could arrange to buy newly imported Indian gold set aside for reserve by an Indian bank.  In turn, the Indian bank could then import more gold and allocate additional gold to domestic buyers.

Ultimately, smuggling volume will explode.  Based on reports from bullion dealers in the Indian press, up to 10% of the imported gold that flowed into India during 2012 was smuggled, much of which occurred when taxes and other restrictions were modest.   This represented approximately 80 to 100 metric tons.  Two to three times as much gold smuggled during the next 12 months is highly probable.  Silver demand is also on the rise;  it’s set to blow away expectations.


2013 Gold Eagles As Low As $54.99 Over Spot At!

2013 Gold Eagle

  1. Wombat…I think TPTB are restricting gold in India because they need the physical gold elsewhere.  Certainly, your points are valid, but in their minds doing everything and anything to curtail the demand for physical gold trumps all common sense it would appear.

    • Of course, you’re right. Both dynamics are going on. India is paranoid about their current account deficit, which makes them all the more receptive to the pressure coming from the Western banking establishment.

  2. Eric  These notions are a bit above my paygrade but if the government mandates that the banks perform some push-me/pull-you gold scam, something along the lines of a shell and the pea, the bankers will always come up with a scheme that benefits them first, the government second and the people last.
    I like the idea that the Chinese and east Indians will start passing gold back and forth along the lines of Goldman Sachs moving aluminum between 27 warehouses, skimming a bit off the rental fees to make billions in profits without actually touching the metal.  If these two countries can do this, it will enhance the gold movement to the east. While I do not like to see the west committing suicide by selling off our gold stores.  That will end badly.
    But in defense of the Chinese and Indians,  I like the statement made by Jeff Goldblum in Jurassic Park I.
     He commented on the hubris of the scientists in cloning dinosaurs.  They thought they could control those creatures from rampant breeding and allowing the population to run out of control and escaping the plantation.  Invasive species like these could ruin your day.
      He said that ‘life will find a way, it always does’
    Human spirit will find a way. Indians are quite spiritual people. Gold is a part of their culture. They will find a way.  They will find a way to get gold. 
    Smuggling  is an ages old means to find that way.  It could be said that smuggling be one of the top tier embodiments of the human spirit, a means to survive and thrive in the realm of oppressive government. 
    Whether it’s booze, drugs,  food, cigarettes or gold,  ‘We will find a way, we always do’  heh heh. 
    Smuggling always does. It caters to basic human needs. Governments don’t.

Leave a Reply