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How Modi’s Demonetization in India Put the Focus on Gold

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Nov. 28 2016, Updated 8:06 a.m. ET

India’s demonetization

India seems to be experiencing an economic sea change, with its prime minister, Narendra Modi, serving as a major force behind this initiative. Modi has curbed the use of high-denomination bank notes in the government’s fight against “black money.”

Modi is also working to uncover the country’s wealth, and gold traders and investors fear that gold may be his next target.

india gold demad

There may be sharp swings in the price of gold. Panicked gold traders and jewelers have circulated messages among themselves that address the possibility of a government ban on importing gold for domestic use in 1Q17. However, there is no official disclosure about gold and its imports by the Indian government.

According to data by the All India Gems and Jewellery Federation, many jewelers are buying extra gold for the wedding season and to see themselves through the next few months, .

Higher premiums

The demonetization in India also impacted gold via higher premiums paid over gold in exchange for the banned currency notes. Premiums as high as 50% have been paid on 10 grams of gold. Although the country’s demand and import figure could barely provide an instant 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 Eldorado Gold (EGO), Kinross Gold (KGC), IamGold (IAG), and Alacer Gold (ASR).

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