INTERVIEW – Market underestimating Modi effect on gold prices – Anthem Vault

May 29, 2014 - 5:23 PM GMT
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India’s newly sworn-in Prime Minister Narendra Modi has promised to take aggressive steps to relax curbs on overseas gold purchases, which will make him gold’s biggest ally, Anthem Vault chief executive Anthem Blanchard told FastMarkets.

“Long-term, I’m extremely bullish gold, largely because of what just happened in India,” Blanchard said. “This was a landmark election that brought into office a pro-business, pro-free market president, who has been vocal against gold tariffs. This is a very, very big deal that has gone mostly unnoticed so far in the Western press.”

To trim the country’s ballooning account deficit, the previous government raised the gold import duty to 10 percent from four percent and mandated that 20 percent of imported gold be exported, which is known as the 80/20 rule.

The impact of these tighter restrictions has been significant. Gold demand in India fell 26 percent to 190.3 tonnes during in the first quarter of this year, according to the World Gold Council.

“The 80/20 rule has caused mass inefficiencies but thankfully we’re already seeing a major about-face in policy,” Blanchard said.

The Reserve Bank of India will now allow “star/premier trading houses” to import gold subject to the 80/20 rule when previously they were only permitted to bring in gold for the purpose of re-export, it said. The RBI also eased some financing regulations, allowing banks to make gold metal loans to jewellers.

“This is just the beginning – positive changes are coming to India sooner rather than later. And it is these reforms that will drive gold prices higher,” Blanchard said, estimating that Indian gold demand will consequently increase 50-80 tonnes per quarter.

CREDIT CRISIS LOOMING IN CHINA

The situation is a little more complex and nuanced in China, where physical buyers have stepped to the sidelines. China imported just 67 tonnes of gold from Hong Kong in April, the lowest level in 14 months and down 21 percent on the March total, according to customs data.

“Near-term, I’m a little bearish on China as I see there being some deflationary pressures from a price standpoint. But at the same time, we’re still seeing massive amount of monetary inflation. Ultimately, this environment will result in financial instability,” Blanchard said.

“There are way too many liabilities in the system right now – in fact we’ve already started to see some defaults [inside of China]. This is something new,” he added.

Beijing has vowed to tackle unstable debt levels but Chinese premier Li Keqiang has said defaults on bonds and other financial products are “unavoidable”.

Shanghai Chaori Solar Energy Science and Technology Co Ltd was the first Chinese company to default on bond payments early in March this year – previously, it was assumed that the state would step in to protect investors. Other firms in different sectors of the economy have since defaulted on payments.

China is approaching a crisis that will rival what happened in 2008 in the US or the Asian currency crisis in the late ’90s, Blanchard suggested.

“And when this occurs, it will reverberate around the world and will serve as the catalyst for the next very large increase in the gold price,” he concluded.

Anthem Vault is a Las Vegas-based online retailer that offers fractional investment in one-kilo gold and 1,000-ounce silver bars vaulted in an independent facility in Salt Lake City, Utah.

(Editing by Mark Shaw)