Is The Exploding Indian Scrap Gold Supply Actually Smuggled Gold?

India was not so long ago the world’s biggest gold consumer. It is fairly well known that China took over that position over the course of 2013, because of a combination of exploding demand for gold in China (both by the retail public, investors and the central bank) and a decrease in official demand in India. The Indian government has taken more than 20 measure in the last 2 years, as we reported here. Indian officials thought to suppress the gold demand to prohibit their citizens converting their declining Indian currency into physical gold, because of a deteriorating current balance.

The effect of the gold suppression in India was a rise in smuggled gold. How much gold exactly has been smuggled is obviously not officially known. But maybe there is an indicator which could help to get an idea of the smuggled gold: the scrap gold supply.

Bron Suchecki, strategist at the Australian Perth Mint and author of the gold blog GoldChat, provided the following chart. It shows the World Gold Council’s estimates of supply of scrap inside India. There is a clear spike in the third quater of 2013. Based on this chart, Suchecki gives his view on the question whether the scrap gold supply is linked to the smuggled gold. What follows is the view of Suchecki which we find interesting enough to reprint here.

india_scrap_gold_supply_2008_2013

The last time this amount of scrap came into the market was in Q1 2009. The WGC explained at the time this way:
“When the gold price initially spiked in late 2008/early 2009, the local media were talking of a sizeable correction (not just in rupee terms, but also in $US terms). This is a key reason why recycling activity was so strong at that time – local scrap dealers reported queues stretching for blocks. The magnitude of this selling back reflected a belief that the jewellery could be repurchased at more attractive price levels at a later date.”
With the gold price at lows, and gold hard to to get in India, I can’t see there being a similar motivation for Indian’s to sell their gold this time. Therefore my readers theory is that:
“Indian Jewelers will not want the Indian Government to think their gold import tax policy is not working. Thus, gold purchased from smugglers will be increasingly reported by jewelers as Scrap/Recycled and they will report record demand of Indians turning in their old jewelry to be updated to new, fashionable designs.”
I find this explanation compelling, considering that a jeweller acquiring smuggled gold needs a cover story to explain how they got that gold, and claiming it was scrap is a good (and unverifiable) way to do that.
I will be interesting to see the amount of Indian scrap the WGC reports in their Q4 2013 Demand Trends report when it comes out in a couple of months.

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing