Mr David Gornall, Chairman, LBMA Thank you very much for asking me - PDF document

Mr David Gornall, Chairman, LBMA Thank you very much for asking me to be one of your keynote speakers. It’s been a while since I was in India , so I have to apologise for leaving it until your tenth anniversary before attending. Congratulations by the way for reaching 10 years, which I believe to be a Tinanniversary. In 40 years’ timeI am sure thatyou can celebrate your Gold anniversary. I have spoken in India on previous occasions and was always briefed beforehand not to talk about India. I was told, “We know about our market, please come with an international perspective.” Ok I thought this will probably be the same. That suits me fine. When I accepted your invite I expected the same, so imagine how I felt when I read what your convention had prescribed for my address today.Innovation, the mantra to survive in tough times- ok I thought, I read on – Indian policy changes, innovative solutions in the gold market that address both industry and government- Are they really asking me to come up with a solution for what is actually the Indian current account deficit? Wow, I thought let’s think about this. Ok, how long have I got? The rest of the day? No in fact you have 15 minutes! I am not an economist- so hopefully you will understand me-I’m joking. I don’t intend to propose a solution; however what I want to do is to talk about the background and some solutions that other nations have used to combat the issue of an appetite for Gold and a growing current account deficit. I realise that you all know the chronology of the events here, but for a foreigner such as me, look at what I had to contend with when making my thoughts for today, and this is just this year thus far. Jan 21 -- The government raises gold import duty by 2 percent to 6 percent. Jan 22 -- The government more than doubles duty on Dore to 5 percent. Jan 30 -- Finance Minister P. Chidambaram says no plans for additional taxes or curbs on gold imports. Feb 1 -- The RBI plans to introduce three to four gold-linked products in the next few months. 1

Feb 6 -- The RBI says it would consider imposing value and quantity restrictions on gold imports by banks. Feb 14 -- The central bank relaxes rules on gold deposit schemes offered by banks by allowing lenders to offer the products with shorter maturities. Feb 20 -- Trade ministry recommends suspending cheaper gold jewellery imports from Thailand. Feb 28 -- India keeps its gold import duty unchanged in its annual national budget, defying industry expectations. Feb 28 -- India proposes a transaction tax of 0.01 percent on non- agricultural futures contracts including precious metals. March 1 -- Finance minister appeals to people not to buy so much gold. March 18 -- The Reserve Bank of India says it is examining banks that sell gold coins and wealth managem ent products to identify "systemic issues", with a view to closing any legal loopholes. April 2 -- Finance Minister suggests unlikely to raise the import tax on gold further to avoid smuggling and would instead introduce inflation- indexed instruments. May 3 -- The RBI restricts the import of gold on a consignment basis by banks. June 3 -- Finance minister says India cannot afford high levels of gold imports and may review its import policy. June 5 -- India hikes gold import duty by a third to 8 percent. June 24 -- India's biggest jewellers' association asks members to stop selling gold bars and coins, about 35 percent of their business. July 10 -- India's jewellers could continue a voluntary ban on sales of gold coins and bars for six months. July 22 -- The RBI moves to tighten gold imports again, making them dependent on export volumes, but offers relief to domestic sellers by lifting restrictions on credit deals. Aug 07 – Finance Minister inform a delegation from Gems & Jewellery Trade Federation the country (industry) needs to manage with less gold, lest the Government comes out with harsher steps. So the first problem I can see here are the multiple adjustments affecting the market. 2

Clearly the country has tried to curb the deficit but with so many communications no one can plan ahead and therefore uncertainty prevails and uncertainty in financial markets usually equals negative sentiment and it’s not just the goldmarket that I am referring to. To try and understand this I looked at us in the in the West. For us, when we can identify that our currency may be subject to adverse economic and monetary conditions, we would normally look for a hedge, be it bonds, other currencies or simply invest for example in real estate. When in 2008 none of these options w as viable, we saw a dramatic increase in purchases of precious metal. In other words, for us Gold buying is a symptom of financial malaise it isn’t in itself the cause of the deficit; the buying is a result of the deficit. So when I first looked at this issue in India, I believed that what should be treated was the cause and not the effect. But of course this is India and it’s not that straight forward. You have vast reserves of coal but still import this along with state subsidies for energy products , food and fertiliser. I don’t want to delve into that area; just point out that Gold isn’t the main cause of the issues facing you. We in the Gold industry of course understand that Gold buying is not only a hedge but also what I would call a cultural asset that has been enshrined in the financial doctrines of families for generations past and I am sure for generations in the future. In other words, Gold buying in India isn’t facing extinction. There are other factors negatively affecting the deficit, however, realistically, we’re not about to propose changes to the policies regarding India’s import bill; we shall concentrate on Gold. One key question is. Should the current account deficit decrease, would there be less buying of Gold due to Indian’s feeling more comfortable holding Rupees? The other factor I needed to understand was why, when we saw gold above 1900 and oil in the 100s the current account deficitwasn’t as bad as it is today or if it was, why no one was talking about it as much as today. India has always had a deficit, a structural deficit, so what’s different today. Of course the answer was due to FDI or expansion of CB balance sheets through foreign investment in Emerging markets. These capital 3

inflows have masked the problem for a number of years and it’s not just India that is suffering from the Bernanke statement that begun the reverse of these flows due to the tapering of QE. You need to keep in mind here what happened to USD price of Gold from the moment that the Fed mentioned QE tapering. Let’s return to that one later. Having heard what the authorities have done, what else has happened. The Gold Rupee trade using ETFs doesn’t work as the material has to be imported. Switch to Capital Account? Fine as a presentation exercise but again the material has to be paid for in Foreign Currency. So although many of you have written on this subjectfrom the perspective of weakening the Rupee, for me, this is a non-starter. Solutions So what can you do if you still want access to Gold and cannot produce it; and if importing Gold doesn’t work for the public purse. High taxes will only result in smuggling. Even if Gold isn’t the cause, I believe we in the Gold market can make some positive suggestions that relate to Gold. In 2001 and 2009 one country saw a rising current account deficit,a falling currency and therefore diminished FX reserves plus 10% inflation. This country also had more than a good appetite for Gold. The country is Turkey. In 2010 faced with the same problems once more with a current account deficit rising to secondplace in the current account deficitleague, inflationat 10% and a 10% current account deficitvs GDP, they decided to come up with something radical. Not an entirely a new scheme but based on what South Korea effected in 1998 by using Gold. Unlike Korea, its citizens didn’t donate the Gold. I am referring to a gold deposit scheme; The first task was a challenge. When trying to attract deposits, you have to be careful what rate is used as too high will result in arbitrage imports 4