With some of the most dangerous global events occurring in memory – Russia flexing its muscles, a Chinese fighter jet intimidating a US plane in international waters as a US carrier group moves into the region, the Middle East on the verge of a radical take over – gold is touching two month lows.

Gold prices dropping

While the market price of gold is dropping, leaving some gold traders wondering what type of world event it will take to move the price higher, supply and demand fundamentals in Asian nations may be distorted due to an increasingly thriving black market.

A recent Barron’s article considers two major pillars of gold demand: India and China.

Ahead of a major Hindu religious holiday last week, official gold demand was strong as it is used as a traditional gift. But where demand was strong, and in many cases buyers desires couldn’t be met, they were met on the black market.

In the face of growing import restrictions imposed by the Indian government, demand for black market gold remains strong.  The World Gold Council estimated that 200 metric tons of gold will be smuggled into India in 2014 and traded on the black market. The black market transactions are estimates and do not factor into official government statistics.

Gold Jeff Saut

India’s restrictions on gold imports to reduce deficits

India imposed restrictions on gold in 2013 with the goal to reduce its growing deficit, but at the time the measure was thought to be a short term move. It surprised analysts and disappointed the regional jewelry industry by keeping the restrictions in place through 2014.  With government restrictions in place, those purchasing gold at both the wholesale and retail level are being forced to navigate the illegal black market.

The impact of restrictions on the free market are significant.  As the Financial Times notes gold smuggling in India has risen significantly as a result of the restrictions. The key comparison is official gold imports year over year.  Official imports were lower by $7 billion in the three months to June, the FT writes, and down $16.5 billion in a year over year comparison. This occurred as imports leaped higher as gold prices dropped.

The FT also noted that demand in India is likely to rise in the coming months during the wedding season, when gold is typically lavished on the happy couple in some segments of Indian society. Further, as several religious festivals approach, this is normally considered an opportune time to buy gold.