Sri Lanka recently ended its policy of adding 100% surcharges to imported gold, as noted recently by state officials. The South Asian nation’s policies were designed to curb internal purchases of gold that were intended for smuggling into India to help the nearly insatiable Indian demand for gold. The net result, however, was an almost complete halt of domestic gold purchases from the Sri Lankan jewelry industry. Not only did the authorities eliminate the 100% tariff on gold, they took the additional step of reducing the previous 10% tax to 7.5%.
Sri Lankan gold traders had been involved in buying the metal overseas and smuggling it into India, one of the world’s largest purchasers of gold. This worked as an arbitrage play as gold prices in India remain consistently higher than in other markets, creating a substantial profit for the Sri Lankans playing the spread. The 100% surcharge on gold put an end to that, but also caused great distress for the Sri Lankan jewelers and other citizens who wished to purchase gold. An even greater issue was the risk that excessive gold bullion imports posed to the Sri Lankan banking industry- gold is so frequently used as collateral against banking loans in the country that a drop in the gold price due to strong import activity put the entire national banking system at risk, as collateral values based on the price of gold shrunk in relation to the loans which they secured.
With the Sri Lankan banking issue internally resolved, the current focus remains on stabilizing the national jewelry industry. The removal of gold buying restrictions appears to be working well and the end result for gold investors is an increase in demand for the yellow metal. We are also left with an even greater understanding of how strong Indian demand for gold is, and how their thirst for the precious metal remains unquenched.
What impact do you think this might have on the price of gold now that a market has opened back up? Please share your thoughts.