India's new gold sales tax is having a huge impact

Reuters/Mukesh Gupta

Last week, I talked about big changes afoot in the world’s top gold-consuming nation, India. With the government there imposing a surprise sales tax on gold, in an apparent attempt to further curb demand.

And the last few days, things got a lot more serious for the gold market in this critical locale.

One of the immediate effects of the 1% sales tax announced on February 29 was a massive outcry from India’s jewelers. Who launched a full-scale strike on March 2 to protest the levy.

That work action has reportedly brought gold sales in the country to a standstill. With one professional in the Indian refining industry telling Platts on Tuesday that there is “no buying anywhere” across the nation.

But reports emerged the last couple days suggesting that jewelers were ready to make a compromise with the government in order to get back to work. And late Tuesday, such a strategy was indeed confirmed by the head of India’s Gems and Jewellery Trade Federation.

And it could be the biggest news to hit the gold market in decades.

The Jewellery Federation director Ashok Minawalla told local press that India’s jewellers have offered to stop selling gold bullion directly to consumers. A practice that up until now has been common — with gold buyers often picking up gold bars from jewellers as investment holdings.

The following is a direct quote from India’s Hindustan Times on what a halt to bullion sales could mean for the gold market:

“The move will likely affect almost a quarter of [jewellers’] overall sales, while also reducing gold imports, which had earlier been driven due to a surge in purchases.

Reuters/Mukesh GuptaMore than 250 to 300 tonnes of the total 900 tonnes of gold annually imported by jewellers, is bought into the country in the form of bullion bars of 100 gm each.”

This suggests that the decision from the jewelry federation could cut demand by up to 300 tonnes, or 9.65 million ounces, annually. A figure that would equate to 7.1 percent of total global demand from 2015.

The effect this could have on the gold price is difficult to overstate. In short, this could be one of the biggest threats the gold market has seen in years. Watch for more announcements on whether India’s jewellers will indeed implement this unprecedented policy.

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