Indian government policies are giving us a first hand view of what happens when the powers that be try to force the hand of a population that doesn't really trust them. Higher taxes, duties, tariffs and regulations cannot stem the demand for gold in a country where the purchasing power of the local currency keeps declining - leading people to rather wear their wealth than put it in a bank. The demand is now being met by an burgeoning underground economy where gold is being smuggled in, is commanding very high premiums to spot and some people are looking to silver as an alternative. We've had air hostesses charged with smuggling gold from overseas and now a Jet airways cleaning crew made a glittering discovery of 24 gold bars worth $1.1 million stashed in one of the washrooms.
The problem is well known within the Indian authorities, including its central bank (Reserve Bank of India).
"Reserve Bank of India (RBI) governor Raghuram Rajan has admitted that there is increase in gold smuggling. However, he said it has been on a very low base and the shrinking of current account deficit (CAD) had largely to do with the restrictions places on gold imports.
Demand for gold jewellery among Indian consumers remains strong, but reduced supply has prevented this demand from being fully realised during the third quarter. The year-to-date demand for gold till September end, in India increased 13% to 452.2 tonnes. However, this is just 18% below the total demand for 2012. During the September quarter gold demand in India fell 23% to 104.7 tonnes, says WGC."
Not entirely sure about that Prof. Raghu.