India Needs To Re-classify Gold Imports As A Monetary Reserve Asset, Not “Purchase”

imagesSilverDoctors.com 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.

 

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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.

 

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