Gold watchers got a surprise two weeks ago when India suddenly changed its highly restrictive gold import law - a major, bullish move for the price of gold...
On Nov. 28, the Indian government officially dropped the "80:20 rule" it imposed in 2013 to curb gold imports. The rule states that 20% of all imported gold must be exported before the country accepts more gold shipments. On Dec. 1 - the first business day after the news broke - shares of the nation's most prominent jewelry companies surged as much as 20%.
"This is a very significant development. I don't think it's gotten anywhere near the press it deserves, and the Swiss vote overshadowed it," Anthem Vault founder and CEO Anthem Blanchard told Money Morning Dec. 5. "This is the story the markets themselves are picking up on."
Money Morning reported June 19 that we expected India to scrap this regulation sometime in the latter half of 2014. The Indian general election had just wrapped up in May, and saw the seating of a new government (including Narendra Modi as Prime Minister). Political platforms of the newly elected leaders suggested there would be a considerable loosening of import duties.
But the elected officials had still not moved by Q3. They cited uncertainty over oil prices and U.S. monetary policy as their reasons.
The consensus seemed to be that the 80:20 rule would carry into 2015. Somasundaram PR, head of World Gold Council operations in India, told Reuters in early September the rules "might extend into the first quarter of next year."
Then Nov. 28 came.
Blanchard said Russia could have played a role in this sudden change.
"I am speculating, but I think the Indian government lifted the 80:20 rule now based on geopolitical reasons. The energy agreement between Russia and India that transpired a few days before could be correlated," Blanchard said. Russian President Vladimir Putin is set to arrive in New Delhi on Dec. 11 to bolster trade links with Asian nations.
"I get the sense though that whatever it was, Modi is dead serious about liberalizing the gold market - he understands a good store of value and how that's going to propel India's economy. I think it's very exciting," Blanchard said.
The lift on the gold import law is going to have a tremendous impact on the price of gold - all the proof you need is in this one, often-ignored number...
How End of 80:20 Moves the Price of Gold
The key number here is the gold forward offered rate, called the "GOFO" for short. It's the swap rate for a gold-to-U.S. dollar exchange.
For instance, if you own gold and you want to borrow dollars, you can use gold as collateral to secure the loan, much in the same way you can use a house. The GOFO is the interest rate you'd pay on that loan.
The London Bullion Marketing Association (LBMA) publishes values for one-month, two-month, three-month, six-month, and 12-month GOFOs daily. Typically, GOFOs are positive. But on rare occasion, rates dip negative - indicating that people are willing to pay interest to borrow gold, using U.S. dollars as collateral.
"Simply put, when rates go negative, it means people really want physical gold," Blanchard said.
And right now, gold forward rates all the way up through the six-month period are negative, Blanchard pointed out. Here are the GOFO values for Dec. 4:
| GOFO | VALUE |
| Forward Rate 1-Month | -0.17% |
| Forward Rate 2-Month | -0.12% |
| Forward Rate 3-Month | -0.08% |
| Forward Rate 6-Month | -0.01% |
Additionally, a look at the period between Nov. 28 - when the Indian government announced its repeal of the 80:20 rule - and the following business day on Dec. 1 reveals a steep drop in GOFO values across all time periods.
"People are placing a high value on physical gold-in-hand right now," Blanchard said. "And the 12-month rate is practically zero - that's significant because it indicates a person is willing to give you an interest free loan for a 12-month period as long as you're willing to give back collateral as gold."
A high value on physical gold is a good thing for gold prices - especially when the driving force stems from India. The nation is the second-largest gold consumer in the world. Together with China, it accounts for more than half of global consumer demand for gold, which is calculated by demand for jewelry, bars, and coins.
"Getting rid of the 80:20 rule is going to have a really bullish effect on the price of gold," Blanchard said. "The GFMS's September 2013 survey estimated dropping both the 80:20 rule and 10% import tax would add 50 tons of gold demand per month. At current gold prices, that's roughly $2 billion per month - it's massive. India accounted for 25% of the world's gold market last year. Just dropping the 80:20 rule will probably bring that up to 30% - or over $1 billion per month - in 2015."
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