(Kitco News) – The Reserve Bank of India’s restrictions on gold imports could “result in negative unintended consequences,” according to the World Gold Council.
The central bank’s move to curb gold demand is starting to attract attention in the global gold industry. On Tuesday, the Indian central bank extended its restrictions on gold imports on consignment basis to all nominated agencies including premium and star trading houses. The restrictions are the RBI’s solution to lower the country’s current account deficit.
Although some analysts don’t expect the import restrictions to have a major impact, some have attributed yesterday’s selloff in gold to the central bank’s announcement. Comex August gold ended Tuesday’s session at $1,397.20 per ounce.
Because India is the top consumer of gold products, the WGC has started to weigh in on the debate.
“India is a significant stakeholder in the gold market with over 20,000 [metric tons] in the hands of millions of people. Policy direction should view gold as a strategic asset for India and its citizens and we support the objective to monetize the nation’s gold stock to support economic growth,” said David Schraeder, a spokesman for the World Gold Council.
Schraeder said the council understands the RBI’s need to balance consumer demand for gold and the health of the economy; however, the WGC sees the restrictions as short-term measures that do not address the underlying issues.
“…We recognize that a large current account deficit is unsustainable and needs to be checked. However there are a number of factors which influence the current account deficit in India of which gold is one,” he said.
“People buy gold as a long-term investment to protect their wealth and gold also has huge significance socially, emotionally and economically in India. Addressing this demand by curbing supply may have a short-term benefit, but this demand will be met by the unauthorized grey market and this will not be positive for either the economy or for society,” he added.
The central bank has slowly implemented restrictions on gold imports. On May 27, the RBI restricted banks from extending loans against gold exchange-traded funds and units of gold mutual funds; on May 13 the central bank restricted gold imports on consignment basis by banks.
By Neils Christensen of Kitco News firstname.lastname@example.org