India’s Gold Tariff Shock A Sign of What Could Come Next for Gold Prices
India has stunned the precious metals market by hiking import duties on gold and silver from 6% to 15%, in a desperate attempt to protect its weakening foreign exchange reserves and curb the country’s growing current account deficit.
The move came just days after Indian Prime Minister Narendra Modi urged citizens to stop buying gold for a year as part of a broader austerity campaign.
History shows these types of government interventions often fail to reduce demand for physical gold. In many cases, they have actually preceded major rises in the gold price.
This is not the first time India has aggressively increased gold import duties. During the 2011 to 2013 period, the Indian government repeatedly lifted tariffs on gold imports in an effort to slow demand and reduce pressure on the rupee. Duties were raised from 2% in early 2012 to 10% by 2013.
What happened next was remarkable.
Instead of collapsing, global gold demand remained resilient while confidence in paper currencies weakened worldwide following years of money printing after the Global Financial Crisis. Gold surged to record highs in many currencies and physical demand exploded across Asia and the Middle East.
The higher taxes also fuelled a massive rise in gold smuggling throughout India, proving once again that governments can make gold more expensive, but they cannot destroy its role as real money.
Today the situation looks even more dangerous globally.
Governments everywhere are drowning in debt, inflation remains deeply embedded in the system, and central banks continue buying physical gold at record levels. India’s decision to raise tariffs is another sign that governments are becoming increasingly concerned about capital flight into hard assets.
The Gem & Jewellery Export Promotion Council warned the higher duties would simply increase domestic prices rather than reduce imports. Major jewellery stocks in India fell sharply following the announcement as markets reacted to fears of slowing consumer demand.
India remains the world’s second largest gold buyer after China, and any move that restricts supply into such a massive market has the potential to place even more pressure on global physical bullion availability.
Throughout history, when governments attempt to discourage gold ownership, it has often been one of the strongest long term bullish signals for the precious metals market.
