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Demonetization Puts Second-Largest Gold Buyer in Turbulence

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Second-largest gold buyer

Aside from Trump’s victory in the US, on the other side of the globe, in India, gold premiums jumped to two-year highs in the week ending November 25 as jewelers ramped up purchases based on fears that the government might curb imports due to demonetization.

Meanwhile, retail demand in the country has been subdued because of the ongoing cash crunch as the government headed by Prime Minister Narendra Modi has banned high-value bank notes. Modi is also working to uncover the country’s wealth, and gold traders and investors fear that gold may be his next target.

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India is the second-largest gold buyer in the world, and any withdrawal of demand from this region could significantly impact the physical market of gold. According to data from the All India Gems and Jewellery Federation, many jewelers are buying extra gold for the wedding season and seeing themselves through the next few months.

Higher premiums

Two-thirds of gold demand comes from rural areas where jewelry is a traditional store of wealth. The demonetization in India also impacting gold via higher premiums paid over gold in exchange for banned currency notes. Premiums as high as 50%, for example, have been paid on ten grams of gold. Although the country’s demand and import figure could barely provide an immediate impact on the market, a longer-term impact may be felt.

The funds that are closely tracked for changes in gold and silver include the iShares Gold Trust ETF (IAU) and the iShares Silver Trust ETF (SLV). Mining shares that are impacted by gold prices include B2Gold (BTG), Royal Gold (RGLD), Alamos Gold (AGI), and First Majestic Silver (AG).

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