Indians don't have money to buy gold

Due to a shortage of money, less gold will be bought in India this year, so expect the World Gold Council and the All India Gems & Jewellery Trade Federation. In November, the Indian government decided to withdraw all 500 and 1,000 rupee banknotes from circulation, rendering more than 80% of all cash in circulation unusable. As a result, Indians now have less cash to buy gold, a problem exacerbated by the fact that most jewellers are not yet able to handle electronic payments.

According to central bank figures, nearly 600 million Indians do not have access to a bank account at all. More than 90% of all transactions in the country are settled with cash. By withdrawing all old banknotes from circulation and only partially replacing them with new ones, there is a great scarcity of money. The money that people have left they prefer to use for the most necessary expenses.

According to figures from India's Mahindra Bank, India will import around 350 to 400 tonnes of gold this year. That is far less than last year's 575 tonnes and almost half less than the average annual import of gold in the period from 2010 to 2015. It seems as if the Indian government has finally found an effective way to Buy gold discouraging them.

Demand for gold in India continues to decline in 2017 (Chart of Bloomberg)

India is waging 'War on gold'

The Indian government has been pursuing an active policy to reduce the demand for gold for years. In 2012 and 2013, the import duty on gold was increased to 10%.  The government also experimented with an import quota, which meant that hardly any precious metals could be imported. This measure also turned out not to work, because more and more gold was smuggled.

In 2015, the government and the central bank joined forces and launched new gold bonds on the market. Individuals could surrender their gold to a bank for a longer period of time in exchange for interest. However, this fee was so low that few Indians bothered to surrender their gold. This year, the government came up with new regulations to thwart jewellers, namely a 1% tax on all gold jewelry. The red tape of this measure was reason enough for jewellers to stop work for some time.

All of these measures were ineffective in discouraging gold. Much more effective was the Indian government's decision to withdraw all large banknotes from circulation. As a result, there is much less money available to buy gold. According to the India Bullion & Jewellers Association , it will take at least until the second half of this year for jewellers to adjust to the new circumstances and make electronic payments possible. How those hundreds of millions of Indians without a bank account will buy gold in the future remains a big question mark. These must first be connected to electronic payment systems.

"In the last three to four years, the gold sector has struggled due to all the measures taken by the government. Because the government is concerned about this sector, it is coming up with more and more new measures. So we don't know what else the government is planning and what it will do in 2017."Bachhraj Bamalwa of the All India Gems & Jewellery Trade Federation told Bloomberg.

Indian gold market stagnates due to shortage of cash