With India’s Market Interventions, Thailand’s Gold Demand Is Up 125%

It does not happen very often but The Economist dedicated a blog post to the gold situation in Asia. In particular, it discusses the effects of the numerous interventions by the Indian government to suppress gold demand in their local market. We reported recently that 15 different measures had been taken since early 2012, mainly gold import hikes and internal market regulations with the banking industry and bullion dealers. By doing so, the country imported a lot less physical gold. Official figures show that 148.2 tonnes had been imported between July and September of this year, which would be a drop of some 30% than the same period a year ago.

The article in The Economist explains that the Indian insatiable demand for gold has resulted in a surge in gold smuggling. Customs officials at airports in India, Nepal and Bangladesh seem to report a spike in gold originating from other Asian countries like Abu Dhabi, Bahrain and Dubai. According to the article, “the effects of India’s attempts to curb gold imports are most widely felt in Thailand.”

From The Economist:

With India’s market ring-fenced, more physical gold has made its way to Thailand. In the most recent quarter demand from Thai consumers surged 125% compared with the same period last year, to nearly 36 tonnes—faster than in any other country. And demand from investors has grown more than 80% this year. The World Gold Council attributes the increase “in no small part due to Thailand being used as a route to channel gold into other markets, notably India and Vietnam.”

But other factors play a role too. Gold has become cheaper recently, the Thai economy and the baht are wobbling, and real short-term interest rates are close to zero. In addition, a period of relative political stability has come to an abrupt end: Thailand has recently seen the biggest street protests since 2010.

Thailand has its own experience with interventions that create unwanted side effects. The Thai government pays high prices for rice produced by local farmers, who are an important political constituency. But their colleagues in Cambodia, Myanmar and Laos have long figured out that by shipping their rice across the border to Thailand, they can pocket a multiple of what it is worth back home.Thai gold smugglers now play this trick on India.

Business has been swift on the top floor of one of Bangkok’s glitziest shopping malls where gold traders and banks make their case for investment in gold. Trading screens outnumber gold bars, of which a few are on display to remind investors of the stuff. But this should count as progress compared to the days when gold shops made a killing in trading gold bars bartered for opium 850km north of Bangkok where Thailand, Myanmar and Laos meet—an area which still is called “Golden Triangle”.

India was the world’s largest consumer of gold until the first half of this year. After the gold price drop of April and June, the demand for gold in China had truly exploded. China is expected to import some 1,000 tonnes of gold through Hong Kong in 2013, becoming the number one gold consumer country in the world.

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