Gold import duties, smuggling and gold seizures

In February 2021, India's Finance Minister announced cut in import duties on gold from 12.5% to 7.5% albeit effective import duty remained 10.75% after imposition of various cesses, surcharges and a 3% GST.. ThePrint’s Editor-in-Chief Shekhar Gupta explains what the small cut in import duty tells us about the Indian political system’s fatal attraction for bad policy.



On 13 August 2013, the Indian government had raised gold import duty from 6% to 10% which was further raised to 12.5% on 5 July 2019. For taxes and gold import duties over 12.5% gold smuggling becomes a lot more profitable than imports creating a very strong incentive for the grey markets to constantly undermine all reforms to make gold liquid and mainstream according to the World Gold Council. India has had a significant history of seizure of smuggled gold which is directly proportional to the amount smuggled rising from 207% from 2016 to 2020. Nearly 70% of total gold seizures made in 2020-21 were of Myanmar origin. Only about 13% came from the United Arab Emirates.

According to Gupta, in the past, gold was smuggled in large quantities as it funded all of India’s underworld and corruption — bureaucratic corruption, customs corruption, judicial corruption as well as terrorism. “Gold is a sink for black money. One way to clean up gold was to open its imports. Second was to reduce or withdraw all duties so that the margin was taken away. And third was to improve India’s foreign exchange rules” Gupta explained.

Commodities Lectures Series - Block Chains vs. Investment Banks in physical commodities trading

Investment Banks have commodities units that make money in three major ways:

1. By helping corporations involved in the physical side of the commodities buisness to hedge their exposure to changing commodity prices through instruments such as exchange-traded futures, options and swaps to curb the cost of big run ups in the price of raw materials needed to purchase.
2. The second way was owning physical assets that dealt directly with raw materials - for example refineries and coal mines to running gasoline storage silos.
3. The third and most lucrative way is house trading or prop trading which is done in several ways - from a client flow trade that requires the Investment Bank to take positions the bank otherwise wouldn't have wanted. For example betting that natural gas prices would fall at a time when consensus was for it to go higher. Another form of prop trading is to use internal Bank's capital to take profitable positions. By early 2000s analysts estimate that prop trading accounted for at least a quarter of Goldman's pretax income.


BCG's strategic view on the role of Block Chain in Physical commodities trading illustrated how recording commodities transactions on a blockchain results in greater transparency and fairer prices. This would seriously impact the commodities prop trading of Investment Banks which rely on informal channels such as instant messaging to negotiate deals taking advantage of price information inefficiencies.

Real-time settlement provided by Block Chains could eliminate clearing risk with fraudulent or poor quality physical delivery of goods forcing Investment Banks acting as counterparties to release collateral earlier eliminating storage profits as was the case with aluminum storage with Goldman Sachs and The London Metal Exchange.

Block Chains can also disintermediate investment banks in commodity markets with low pricing complexity and low degree of diversity in pricing mechanisms such as Power. EnerChain, the world’s first trading tool for large-scale wholesale peer-to-peer energy trading over the blockchain developed by big European gas and power companies consortium achieves exactly this disintermediation through Block chain based trust, security and transparency between the market participants.

These Consortium permissioned blockchains governed by a group of commodtities participants has the most disruptive potential to align market participants towards real-time streamlining of matching, clearing and settlement of trades, asset exchange, standardization and wholesale peer-to-peer trading. In 2019, EnHelix Marketplace, a Block Chain based marketplace to streamline scheduling, nomination, and billing operations for midstream natural gas market participants including cargo brokers, and logistics companies was unveiled at the Gastech energy conference in Singapore. This HyperLedger based distributed ledger streamlines commodities trading with applications supporting every step of the process from pre-trade KYC, trade execution to post-trade risk management with smart contracts making these energy trades faster and more organized for market participants.Consortium blockchains are more decentralized thereby resulting in higher levels of security. That being said, setting up such consortiums around physical commodities trading can be a fraught process as it requires cooperation between all the participants and presents logistical challenges as well as potential antitrust risk.

Physical commodities may be entering a new supercycle from the beginning of 2022

The US Energy Information Administration reported in early January 2022, that while energy prices in the S&P Goldman Sachs Commodity Index (GSCI) ended 2021 59% higher, most other commodity indexes included in the GSCI increased by about 20%. Sharp price increases were largely driven by increased demand from the initial phase of global economic recovery from the COVID-19 pandemic. Goldman Sachs also seems very bullish on commodities even projecting a long supercycle for years to come.

The last time physical commodities were in a supercycle was in the 2000s when commodities were rocketing to their all time highs. This supercycle fizzled to an end at the end of that decade. In October 2012, Goldman Sach's Jeff Currie, then a commodities analyst, now the global head of commodities research observed at the London Metal Exchange meeting that the collective assets under management were the lowest they had been in a decade in commodities focused hedge-funds and the average commodity fund in 2012 was on track to lose close to 3%.

Improved Gold price discovery may lead to even higher imports into India

Qualified Indian gold jewelers and bullion dealers are now authorized to buy gold bars and coins directly via imports from the India International Bullion Exchange (IIBX). At present, gold imports are allowed only through Reserve Bank of India nominated banks and India's Directorate General of Foreign Trade licensed entities such as the State Trading Corporation (STC) of India to import gold in the form of the more popular 100 gm and 1 Kg bars with 0.995 (67%) and 0.999 (33%) purity, for Indian traders or jewellery manufacturers on consignment basis. Gold officially shipped into India comes via air into 11 cities as well as a Free Trade and Warehousing Zone (FTWZ), located in the town of Satyavedu. Indian gold imports have continued to rise despite high import duties with official imports averaging 760 tonnes per year since the first hike in 2012. In 2016-2020, imports made up 86% of India’s gold supply while recycling accounted for 13% and mining accounted for just over 1%. Since the first duty hike in 2012, India has imported some 6,581 tonnes of gold - rising from $37 billion worth in 2018, 377 tonnes in 2020 reaching a record $55.7 billion in 2021 buying more than double 2020's tonnage, as a price drop favoured retail buyers and pent-up demand emerged for weddings that were delayed when the pandemic first hit.
The ownership of the imported gold vests with the overseas exporter until its agent in the country (e.g. authorized banks) sells it to a domestic buyer. The banks and other agencies get a fee from the exporter for handling and storage and also add a premium to the gold while transacting with the domestic buyers. The buyers pass this premium on to the value chain until it reaches the end customer, who has little knowledge of the gold’s price discovery with price quotes for the gold across the country being opaque. The premium charged was up to $1 an ounce over official domestic prices in January 2022 (inclusive of 10.75% import and 3% sales levies) as opposed to $5 discounts in December 2021, which were the largest in five months.