Gold sees red as India mulls curbs on physical holdings

India's once thriving gold jewellery trade is set for another shock with the government mulling curbs on physical holdings of gold by individuals and households, close on the heels of the demonetisation drive that hit the bullion market really hard, not just in India, but around the world as well.

The move to impose limits on physical holdings of gold is seen as an extension of Prime Minister Narendra Modi's fight against "black money", reports citing unnamed finance ministry officials said.

India is the world's second biggest consumer of gold, and it is estimated that one-third of its annual demand of up to 1,000 tonnes is paid for in black money - untaxed funds held in cash that don't appear in any official accounts.

The move to withdraw higher denomination notes has already started to disrupt cash-based gold smuggling, officials point out.

On Wednesday gold prices fell in a few hours from $1,217 an ounce to $1,176. Gold had also fallen soon after the Trump victory, on his spending plans, which strengthened the dollar.

Commenting on the fall in international prices of gold and a sudden spurt in the value of the dollar, US-based strategic investor Nigam Arora said the gold price fall was driven by India and not by a rising dollar or Donald Trump's US Presidential election win.

''Converting black money into white money has been a major source of demand for physical gold. Now that large bills used to buy gold are worthless, demand for physical gold will decline,'' he said.

According to Arora, ''to understand heavy selling from India on Modi's move, one has to understand the underground economy in India that runs on black money''. His report estimated the underground economy in India at a fifth to a fourth of the total.

Market fears have been exacerbated by rumours that the government could restrict import of gold or even ban it for a few months after its imports rose by $2 billion in the nine days after demonetisation.

The customs department is reported to have cleared gold imports worth $900 million on 16 November. Imports have slowed since as demand dried out with cash constraints in the domestic market.

With the dollar value strengthening, several countries where exposure to gold is higher are rumored to be considering taxing the gold trade or restricting its import.