When uncertainty reigns, investors all over the world turn to gold as a safe haven. But some countries are starting to take issue with their residents’ preference for storing wealth in gold bars, rather than bank accounts.
Large gold imports can throw off a country’s current account balance – the difference between what a country earns and what it spends on foreign trade. Widespread investments in physical gold also mean that large pots of wealth sit idle, instead of being put to work in the broader economy. And in countries where gold is a popular investment, those financial institutions which carry large gold deposits, lend cash against gold or offer interest-bearing gold deposit accounts, can pose a risk to the financial system if commodity prices suddenly shift.
Governments in India, the largest gold importer in the world, and Vietnam, a country which imported 95% of its domestic gold consumption in 2011, have taken steps in the past year to discourage savers from hoarding gold. The Indian government doubled import duties on gold bullion to 4 percent in March and with current account deficits at record highs, recently announced another hike to 6 percent.
Taxing Their Way Out of Gold?
“It is difficult to establish the impact (of the tax) on CAD,” Indian Economic Affairs Secretary Arvind Mayaram said, according to Reuters. “But there will be some moderation in gold demand.”
Though Credit Suisse analysts say the higher taxes could weaken import demand by as much as 10 percent, they believe the health of the Indian economy and rupee strength will probably play a larger role in determining the country’s demand for gold this year.
Indian gold imports already appear to have slowed. After several years of acceleration, the Reserve Bank of India reported last month that gold imports between April and October 2012 dropped to 398 tons from 589 tons during the same period in 2011. In a recent note, Credit Suisse analysts predicted that net imports were on track to drop to no more than 800 tons for the whole of last year from 2011’s approximately 970 tons.
But analysts also note that it is difficult to know how much of that slowdown can be attributed to tax increases since the rupee also depreciated sharply over the year.
Gold is especially popular among lower-income residents in India and has deep cultural significance, especially as a prized component of wedding celebrations. This year contains more days considered auspicious for a wedding than 2012 and national elections loom in 2014, Tom Kendall, Credit Suisse’s Head of Precious Metals Research wrote in a recent note. Those factors could make it more difficult for Indian politicians to impose more tax hikes.
A Sound Investment
A pitch against gold is also hard to make for other reasons. Gold investments in rupees have performed well over the past 10 years, with the value of the yellow metal rising by 477 percent – more than the 425 percent rise in India’s S&P Nifty 50 stock index over the same period. Low interest rates and easy access make other investments relatively unattractive, Kendall notes.
“For a significant proportion of the (Indian) population, it remains easier to buy gold jewelry than to open a basic bank account,” he writes. “It is illustrative, we think, that a recent initiative by the World Gold Council to market 24-carat gold coins to rural communities was launched in partnership with the Indian Post Office rather than a retail bank.”
Many Indians use gold to hedge investments against inflation. But a working group convened by India’s central bank recently advocated a range of alternative investment products which could be used by the public as an alternative to gold for inflation hedging. Gold-linked savings accounts, bonds and certificates that entitle a holder to physical gold could help reduce demand and quickly move more liquid assets into the country’s banking system, the group suggested.
Along with hiking import duties, the Indian government recently announced new rules that make it easier for savers to open gold deposit accounts.
Gold Prices Peak in Vietnam
Vietnam’s government is trying to tackle a similar problem through aggressive intervention in the local gold market. More than 31 percent of Vietnamese households keep some of the shiny stuff on hand, according to a survey by a government finance committee cited in a recent Credit Suisse note. High inflation levels and a weakening Vietnamese currency have made Vietnamese investors even more eager to snap up gold.
The Vietnamese government has intervened to mitigate the resulting spread between local and international gold prices. After temporarily suspending interest-bearing gold deposit accounts and certificates in 2011, the government has told banks and credit facilities to phase out gold deposits and loans for good. The government has also taken over the country’s largest gold refinery, and the State Bank of Vietnam is rolling out a new set of licenses allowing traders to buy and sell gold bars only if they meet strict requirements.
In the end, both Vietnam and India walk a tightrope in trying to wean citizens off gold in times of high inflation and economic uncertainty, while also trying to avoid encouraging a black market.
“As with India, the government will be wary of driving more of the gold trade underground,” Ric Deverell, Credit Suisse’s Head of Commodities Research wrote about Vietnam in a recent research note. “Gold’s utility as a highly portable, high-value store of wealth is as relevant today as it has ever been.”