India is one of the largest gold importers around the world, purchasing around 700 tons of gold per year. Experts state that the demand for gold in India is higher than most assets and reserve currencies, arguably making gold the most valuable asset in the country.
However, reports suggest that the government may be planning a ban on the importation of gold, as gold premiums reached two year highs this month.
Chirag Thakkar, a director with Amrapali Group noted:
"We are seeing some jewellery demand due to the ongoing wedding season and crash in prices. But the cash constraint is going to be really tough for the gold industry in the near future, especially from rural areas.”
Among the explanations for the surge in gold premiums, experts cited the devaluation of the Chinese yuan and a potential ban on the importation of gold.
A Mumbai-based dealer with a private bank, stated in an interview with Reuters that a potential ban on gold importation is more likely, as the government previously hinted on banning gold after scrapping 500 and 1,000 rupee bank notes.
"There was a rumour that after scrapping 500 and 1,000 rupee notes, the government will ban gold imports. It prompted many jewellers to increase buying,” said the dealer.
Market shock ahead
As previously reported by Cointelegraph, India demonetized the two bank notes in order to reduce corruption and money laundering activities in the region. The government may now switch their focus on gold, presuming that money launderers and corrupt organizations will seek alternative safe assets to store their wealth.
Nigam Arora, financial expert and founder of the Arora Report, noted that the importation ban by the Indian government could result in a similar market shock to that of President Nixon’s decision to eliminate the gold standard in 1971.
“Second, Indian Bullion & Jewellers Association has informed its members that they are hearing from certain circles of a potential ban on gold imports. Subsequent to our earlier information, this has now become public. Third, social media in Asia is abuzz with these rumors,” Arora further noted.
If a ban on gold import is imposed, the demand for other safe haven assets will significantly increase. The only accessible global safe haven asset with high liquidity and stable global exchange rates is Bitcoin, which has already seen an increase in trading volumes after the denomination of 500 and 1,000 bank notes in India.