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Gold Price Cuts India Demand as Government Schemes Don't

India's gold prices reducing gold demand whilst government schemes struggle...

HIGH GOLD PRICES have seen India's gold import volume fall sharply, something the government has been trying to achieve with new schemes to deter household demand since the end of 2015, writes Katie Hillan at BullionVault.

With gold prices in Rupee terms rising over 16% in 2016 so far, gold imports into India have fallen year-on-year for four months straight due as consumers cut their demand.

"At this level," says trade body director Bachhraj Bamalwa at the All India Gems and Jewellery Trade Federation, "no one wants to buy. Everyone is waiting for a correction."

April saw only 22 tonnes imported, with May's inflow to the world's No.2 consumer market more than halving from the same month last year to 31 tonnes.

2015 imports totalled 939 tonnes – a monthly average above 78 – despite the launch of several government schemes aimed at deterring demand.

Chart of Indian gold imports by month from Metals Focus

With Indian residents owning an estimated total 11% of the global gold stock, the Indian government last year announced two schemes to try and curb India's high demand for gold.

The objective of the Gold Monetisation Scheme (GMS) was to mobilise some of the gold already held by Indian households, estimated to be around 22,000 tonnes worth $1 trillion.

The scheme then plans to make gold available as a raw material, on loan, to the jewellery sector in order to reduce its reliance on imported bullion to meet new domestic demand.

Over the past 6 months only 2.8 tonnes of gold have been collected under the GMS.

State-owned Punjab National Bank is the top gold collector, having mobilised 1,311kg of gold, according to The Economic Times of India.

The Sovereign Gold Bond Scheme, meanwhile, allows investors to acquire returns linked to the gold price, plus a rate of interest. The bonds are bought and sold in Rupees but denominated in grams of gold.

The first three tranches of gold bonds, issued between November and March, attracted Rupee investment equal to 3.8 tonnes according to figures quoted by India Express.

"Prices [are] expected to move higher during the second half of this year," says specialist consultancy Metals Focus in its latest India Focus Monthly.

"As price expectations continue to improve, this will lure back Indian investors and see consumers increase their spend on gold."

Gold importing increased in May from March and April's lows, when many Indian jewellers were closed in protest at the government imposing a new 1% excise tax in its February budget on all gold objects made and sold in India.

"The excise duty will bring jewellers' business to a standstill," said Ketan Shroff, a spokesman for India Bullion and Jewellers Association, warning that many of the nearly 10 million artisans working in the industry could lose their jobs.

A student of Natural Sciences at Durham University, Katie Hillan is currently working as a research assistant at BullionVault. 

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