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Optimistic Signs in Indian Gold Market Despite Q3 Demand Drop

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If you saw the headlines last week, you know overall global gold demand fell steeply in the third quarter of this year. But as we reported, there was a lot of good news for gold buried beneath the gloomy headlines.

Slumping Q3 gold demand in India was a big driver in the overall global decline, but even there, we see some signs of optimism. Indian gold-buying dropped off primarily due to new taxes and regulations imposed by the Indian government over the summer. There are already signs the market is adjusting

On July 1, the Indian government replaced a labyrinth of taxes with a nationwide 3% Goods & Services Tax (GST). New anti-money laundering legislation also impacted the jewelry market.

After three consecutive quarters of growth, gold demand in India fell 24% year-on-year in Q3 to 146 tonnes compared with 192.8 tonnes in Q3 2016. The drop in jewelry demand was most significant, likely a byproduct of the new taxes and regulations. Jewelry demand fell by 25% to 115 tons in the third quarter compared to 152.7 tons in the previous year.

Managing Director, India, of the World Gold Council Somasundaram PR said that despite the drop in demand in Q3, he sees reasons for optimism.

The drop can be attributed partly to some advance buying in Q2 to pre-empt the introduction of GST in Q3. However, with the industry’s gradual transition to GST proceeding on expected lines, and the removal of AML legislation, demand during the festive season seems to show clear signs of recovery in the last quarter.”

The removal of AML legislation Somasundaram PR mentioned refers to anti-money laundering rules that initially applied to jewelry sales. The rules increased compliance requirements for high dollar jewelry purchases. Buyers had to provide their income tax identity for transactions above 50,000 rupees ($766). The government reversed the rules as they applied to jewelers in October.

Even with taxes and regulations putting a damper on sales, gold continued to flow into India. Imports were up in both August and September. After nearly tripling in August, gold imports rose 31% year-on-year in September. Smuggled gold also poured into the country, as Indians tried to avoid the government taxes and regulations.

The World Gold Council predicted the new tax structure would initially dampen gold demand, but said it will likely boost the gold market in the long-term.

The fact is gold is such an important part of the Indian economy, it is unlikely any government action will suppress demand for long.

While you may think of gold as a luxury item, many Indians view it as a necessity. In the Asian nation, buying gold is not just for the rich. In fact, a recent survey shows owning the gold is a universal phenomenon across all income classes in India. The yellow metal is interwoven into the country’s marriage ceremonies and cultural rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system. This explains why even the poor buy gold in India.

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