While the optics of a soaring stock market and crashing safe-havens (gold and bonds) fits nicely with the election of Donald Trump as the next US president, a closer look shows gold prices beginning to break hours earlier. As India unleashed its demonetization scheme, local retail gold prices began to surge as rumors began to spread of an Indian gold import ban. As rumors have continued, precious metals prices have plunged as the 700 tons of gold imports to India would be a major demand shock for the bullion market.
As MarketWatch reports, back in August 1971, President Nixon shocked the world by taking the dollar off the gold standard. The dollar had been on gold standard since Bretton Woods Agreement of 1944. The biggest bombshell for gold investors in 45 years since Nixon announcement may be ahead. That bombshell is a potential ban on import of gold into India. If this happens, there is a high probability of a one-day drop in gold that could reach $200.
The chart shows how Modi selling overcame Trump buying…
And kept going as rumors of an Indian gold import ban increased…
As a reminder, India’s Modi has directed that 500 and 1000 rupee notes be banned. These notes represent 20% of the cash value in circulation and 80% of cash outstanding. MarketWatch’s Nigam Arora explains…
To understand the heavy gold selling from India on Modi’s move, one has to understand the underground economy in India that runs on black money.
Estimates have been that the underground economy in India is about 20% to 25% of the total economy; the point is that it is very large.
The most common method to convert black money into white money over the past 50 years has been to slowly buy gold by paying cash using large bills. Converting black money into white money has been a major source of demand for physical gold. Now that large bills used to buy gold are worthless, demand for physical gold will decline.
Indian imports are a huge deal…
On average, India imports about 700 tons of gold each year.
This is an enormous quantity. An abrupt reduction in demand of this magnitude, if there is a ban on Indian imports, will be a major shock to the gold market.
As The Arora Reports notes, even though the media in much of the Western world is mostly still oblivious to this major potential development ahead, they now feel comfortable publishing this for three reasons…
First, the premium on gold being sold in India has jumped to $12 per ounce, the highest premium since November 2014. We see this jump in premium as tangible proof that the rumor is taking hold and affecting gold price.
Second, Indian Bullion & Jewellers Association has informed its members that they are hearing from certain circles of a potential ban on gold imports. Subsequent to our earlier information, this has now become public.
Third, social media in Asia is abuzz with these rumors.
At this time, it is very important for gold investors to stay plugged into sources knowledgeable about gold in India and be alert to any further signs that an import ban may be in the offing. Investors should review their precious-metal holdings to make sure they are comfortable just in case there is a big downdraft.
* * *
One can’t help but wonder if efforts to block ‘black money’ being reallocated to gold will not further excerbate capital flight and ironically lead to an export boom as people try to move assets offshore… as opposed to spiking local gold prices (as India’s traditional demand meets considerably limited supply). Certainly seems like time to stock up on condoms and lube as smuggling looks set to be the new growth business in Asia.