Cash Crisis in India Hitting Gold Sales Hard

The domestic gold market in India is facing an upheaval as traders place an increasing number of bulk, short-term orders on fears Prime Minister Narendra Modi could seriously throttle overseas imports of gold. The traders’ fears stem from Modi’s plan to eliminate so-called black money from India’s monetary system by demonetizing the 500 and 1,000 rupee notes. The bills were previously the country’s largest currency denomination.

Modi’s hard-line demonetization efforts are meant to root out untaxed funds held in secret by Indian citizens. It’s estimated up to a third of the country’s annual demand (1,000 tons of gold) is paid for with black money. The intent of demonetization was to cut down on corruption by targeting Indians holding “large amounts of undeclared wealth to deposit the money at banks and make their assets official,” according to the L.A. Times.

However, revoking the currency’s sovereignty has had unintended consequences for India’s poor and has led to nation-wide currency shortages. The recalled 500 and 1,000 rupee notes, which are currently worth around $7.50 and $15 respectively, make up approximately 86% of available cash. The shortage has led to long lines at banks, ATMs, and post offices, which are charged with exchanging the worthless notes for new ones.

Modi’s monetary plan also involved a new 2,000 rupee note and a revamped version of the 500 rupee bill. The change is adding to the cash flow problem because the bills are different sizes and banks have to reconfigure the country’s 200,000 ATMs to work properly with the new bills.

Although the prime minister hasn’t directly revealed next steps, many gold traders are looking to stock up reserves in case there’s a crackdown on overseas purchases.The rush to buy gold with such a shortage of cash could “create sharp swings in purchases, affecting world prices,” according to the Times of India.

Many gold traders and jewelry shops are shutting their doors to customers and the bullion merchants association has stopped quoting gold rates all together. Some shops have remained open but are refusing to take the old 1,000 and 500 rupee bills. Still others are taking the defunct notes, but are charging a marked up premium of up to 50% to those looking to offload their black money.

Credit and debit cards are still available, but make up only 10% of transactions for Indian jewelers, according to the Times of India. Tightening gold reserves are coming at a bad time for Indians who are observing their traditional wedding season, which accounts for a majority of the gold purchases for the world’s second largest gold buying nation. Jewelers are expecting the cash crunch to deeply impact sales, which usually peak during November.

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