As the Indian Government exercises additional steps to curtail gold imports into the country, China plans to take up the slack by becoming the largest gold consumer in the world in 2013. Already, Indian gold imports are starting to decline.
According to the Bloomberg article, Gold Imports by India Seen Tumbling as Curbs Boost Titan’s Costs:
Shipments in June will decline as only orders placed before the curbs are being imported now, said Rajesh Mehta, chairman of Rajesh Exports Ltd. (RJEX) Overseas purchases tumbled to an average $36 million a day in the 14 business days through June 7, compared with an average $135 million a day through 13 days until May 20.
The main reason the Indian Government took the action to reduce gold imports was due to its ballooning trade deficit. If we look at the chart below, we can see that India has suffered trade deficits every month for the past several years.
Moreover, Indian’s trade deficit increased an additional $38 billion in April & May mainly due to a 90% increase in gold and silver imports from last year (thebull.com).
According to several sources, India imported 100 tonnes of gold in January (total 215 tonnes Q1 2013), 117 tonnes in April and an estimated 162 tonnes in May. The big increase of Indian gold imports in May pushed their deficit to a record to $20.1 billion.
Here we can see how the increase of Indian Gold imports have impacted its trade deficit over the past decade:
Another reason why India’s trade deficit has become an increasing problem for its Ministry of Finance, is due to its relation to the country’s GDP. If we compare India’s trade deficit compared to its 2012 GDP, we have the following:
INDIA TRADE DEFICIT vs GDP
JAN-MAY 2013 Trade Deficit = $83 billion
JAN-MAY 2012 GDP = $770 billion (based on 5 months of 2012 GDP)
JAN-MAY 2013 Trade Deficit – $83 billion/ $770 billion = 10.8%
India’s trade deficit for the first five months of 2013 is 10.8% compared of its estimated Jan-May 2012 GDP. This is a huge figure. Even though the United States has been running larger trade deficits for quite a while, its percentage of deficits to GDP is less than a third compared to India.
USA TRADE DEFICIT vs GDP
JAN-MAY 2013 Trade Deficit = $202 billion
JAN-MAY 2012 GDP = $6.3 trillion (based on 5 months of 2012 GDP)
JAN-MAY 2013 Trade Deficit – $202 billion/ $6.3 trillion = 3.2%
While India and the United States continue to suffer from trade deficits, China has had the opposite experience:
Except for a couple of months in the past two years, China has recorded a positive balance of trade:
CHINA TRADE SURPLUS vs GDP
JAN-MAY 2013 Trade Surplus = $82 billion
JAN-MAY 2012 GDP = $3.0 trillion (based on 5 months of 2012 GDP)
JAN-MAY 2013 Trade Surplus – $82 billion/ $3.0 trillion = 2.7%
If we look at the chart below, part of the reason why China suffered a small trade deficit in May was due to the huge increase of gold imports from Hong Kong during the same month:
Furthermore, I noticed an interesting trend taking place between these countries gold imports and the price action of the yellow metal.
CHINA 2013 HONG KONG GOLD IMPORTS
JAN = 51 tonnes
FEB = 97 tonnes
MAR = 223 tonnes
APR = Gold take down -$250
INDIA 2013 GOLD IMPORTS
APR = 117 tonnes
MAY = 162 tonnes (estimate)
JUN = Gold take down -$140
It seems quite interesting that the price of gold fell $250 in April, a month after the Chinese imported a record 223 tonnes of gold from Hong Kong. Then after the Indians took advantage of a much lower price of gold by importing a record amount in April-May, the yellow metal was whacked again in June.
Now, some precious metal analysts stated that the drop in the price of gold was due to falling demand and the only reason why demand picked up was due to falling prices. However, the Chinese imported a record 223 tonnes of gold from Hong Kong in March while the average price only fell $34 compared to the Feb. Then the Indians imported 45 more tonnes of gold in May than April, even though the price increased $125 from the lows the month prior.
We will never know how much gold the Indians would have imported in June. With the Indian Government putting the kabosh on gold imports, it looks like the Chinese just may step in and become the largest consumer of gold in 2013.
From to a recent article by Mineweb, Weddings could help boost Chinese gold demand past India:
With some 6.6 million brides in China set to receive gold at their weddings this year, weddings are turning out to be a multi-billion dollar business in China, for the gold industry.
… Stating that Chinese brides tend to go for gold and that most grooms shell out a bride-price and “then have to hand over several kilos of gold to get the bride to say yes,” Khota said, “The bride will also bring in a dowry from her parent’s side, which mostly constitutes gold ingots and gold jewellery.”
The China Gold Association has said total demand in 2013 could be near 900 to 1,000 tonnes in China, surpassing demand from India. A top official told Bloomberg that some of the jewellery demand earmarked for festivals or weddings later in the year could have been brought ahead to April and May to take in the slide in gold prices.
It is interesting to realize that the Chinese like the Indians are purchasing gold to be used as a dowry for the Bride (Chinese) and Groom (Indian) during weddings. This could turn out to be a huge increase in gold purchases in the future as China continues to grow their economy and GDP. Furthermore, due to China’s healthy trade surpluses, they can import a great deal more gold without negatively impacting the trade balance, unlike India.
Even though China may overtake India as the largest gold consumer in 2013, government intervention may prove futile in controlling India’s demand for the yellow metal in the long-term.
Lastly, the real problem the central banks face in the future is not trying to control gold demand in India or China, but rather the entire world. As the global paper financial system becomes weaker each passing day, increasing demand for gold will come from additional countries. At some point in time the central banks will lose the paper war and the world will find out that gold won’t be available at any paper price.