The 10-tola gold bar!

[harharmahadev]

The 10-tola gold bar!



India was the world's largest gold market prior to 1962 and Bombay (new name is Mumbai) was the main trading center. After the Indo-China war in 1962, due to loss of reserves, the government enacted the Gold Control Act, 1962 prohibiting the citizens of India from holding pure gold bars and coins! The old holdings in pure gold had to be compulsorily converted into jewellery that had to be declared. Only licensed dealers were allowed to deal in pure gold bars and coins. New gold jewellery purchases were either recycled or smuggled gold.

This legislation killed the official gold market and a large unofficial market sprung up dealing in cash only. The gold was smuggled in and sold through the unofficial channel wherein many jewelers and bullion traders traded in smuggled gold. A huge black market developed for gold.

Gold was smuggled into India in the size of 10-tola bars (called a TT bar in trade parlance). The traditional Indian measure for gold is "tola", a name derived from the Sanskrit word "tula" for scale or balance, and one tola is equal to 11.664 grams. Hence a 10-tola bar weighs 116.64 grams. "The size of the 10-tola bar enables it to be easily concealed -- specially designed smugglers' vests hold around 100 bars in 20 or more pockets. It has smooth, rounded edges so that it can be inserted inside a smuggler's body -- up to eight bars in the rectum. Another important feature is that the bar has no serial number, unlike almost all other cast bars available on the international market. That made the ten-tola bar the gold currency of choice, especially from 1947-1992 when India strictly regulated gold imports, giving rise to a massive black market. "

Additionally, the 50's to the late 80's were a period when India embraced socialism with a passion. The government moved towards a controlled economy wherein all the factors of production and resources were controlled and licensed. This led to nothing more than corruption and shortages resulting in profiteering by the businesses. In 1990 India had a major foreign exchange problem and was on the verge of default on external liabilities. The Indian government pledged 40 tonnes from their gold reserves with the Bank of England and saved the day. Subsequently India embarked upon the path of economic liberalization.

The era of licensing was gradually dissolved. The gold market also benefited because the government abolished the 1962 Gold Control Act in 1992 and liberalized gold import into India on payment of a duty of Rs 250 per 10 grams (periodically the government feels obliged to fiddle with the duty structure if it works well). The government thought it more prudent to allow free imports and earn the taxes rather than to lose it all to unofficial trade -surprisingly a very pragmatic view. This expanded the gold market while reducing the quantum of trade and the profit margins in the unofficial channel. According to the WGC figures, from official imports of practically nothing in 1991, India officially imported more than 110 tonnes in 1992 whereas smuggled gold maintained at about 160 tonnes in 1992 and gradually declined thereafter. The official imports grew from 1992 and now the official imports are about 600 tonnes peaking at 663 tonnes in1998.

Gold smuggling that was on the rise again last year due to high excise duties has subsided this year after the government has again reduced the duty to about Rs 2914 per TT bar in addition to local taxes. India is the most price-sensitive market for gold in the world.

According to GFMS, the smuggling channels have become more efficient (reduced number of seizures and lower costs). "Gold enters India via a number of different routes. The trade routes are complex but can be divided into two distinct categories - direct flows and indirect flows. Direct shipments (mainly official) in the main are from the refining centers of Europe, South Africa and, to a lesser extent, Australia. Indirect flows tend to move through the two entrepots of Singapore and Dubai in the first instance. Direct and indirect flows out of Hong Kong are small. The smuggled gold flows through the indirect channels" (2).

In the first quarter 2002, demand in India has fallen by 40 % to 150 tonnes from 250 tonnes in 2001. However, as discussed earlier, this has been partly compensated by the huge quantity of the retail sales (dishoarding) by the masses which is being recycled in the Indian market. On a visit earlier this month to a gold dealer's shop, I was surprised by the long line of people who wanted to sell their old gold jewellery. Out of curiosity I asked why they were selling and the routine response was that this is a very high price and it may or may not sustain! Unfortunately these folks have never heard of rupee devaluation and gold as a barometer of inflation. I mused at what their emotions would be six months later! I also believe that once the gold price breaks out, the masses will stop selling and start hoarding again.

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