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INTERVIEW: CPM Group: Indian Gold Demand Should Rise But Uncertainty Due To Duties, Weak Rupee

By Allen Sykora Kitco News
Thursday August 22, 2013 12:25 PM

(Kitco News) - India’s gold demand typically picks up in the final months of the year, but there is  some uncertainty this time around because of efforts by the government to curb imports and due to weakness in the country’s currency, said Jeffrey Christian, managing director of CPM Group.

“There is an expectation that – if the government doesn’t muck it up – demand could be stronger in the last four months of the year…,” he said. “However, the government has imposed import restrictions and increased the taxes (on gold imports). That causes prices in the domestic market to go higher than in the international market and you pay a premium. That is restricting sales.”

Christian spoke with Kitco News Thursday on his observations after completing a trip this week to the key gold-consuming nation. India historically has been the world’s largest consumer of gold, although the World Gold Council said last week that 2013 could be a neck-and-neck race between India and China on which nation is No. 1.

“Indian demand has been very spotty this year,” Christian said.

CPM Group anticipates that total Indian investment and fabrication demand in 2013 will be around 23 million to 24 million ounces.

To put this in context, he said, demand in 2010 was around 31 million ounces, before sliding to around 27 million in 2011 and around 24 million in 2012.

“Demand is lower than it has been, and there are a variety of reasons for that,” Christian said. “You’re seeing sporadic buying. There are import restrictions and there are increased duties on importing and buying gold, which combined with a very low rupee and very high gold price by historic standards, have caused demand to fall.

“Also, you have worse economic conditions there. People are not earning as much, so they are not investing as much in gold.”

India has been trying to limit gold imports in an effort to contain the country’s large current-account deficit. As a part of this, authorities last week hiked the tax on imports of gold to 10% from 8%, the third increase this year. There have been other restrictions as well, including a ban on imports of coins and medallions announced last week.

Meanwhile, the large current-account deficit is one of the factors that pushed the rupee to an all-time low, which makes the metal more expensive in rupee terms for Indians. The dollar rose through 62 rupees for the first time Monday and gained more since, hitting a record high of 65.553 overnight.

Gold historically often rises in the period from early autumn until the end of the year due to a number of gift-giving holidays around the world, with perhaps the most widely cited being the autumn Diwali festival in India. But there is some uncertainty on what to expect this year with the new government measures and weak rupee.

“Indian dealers are trying to figure that out right now,” Christian said. “They expect, and we expect, somewhat stronger demand, probably because you’re going into the wedding and festival season. It’s a time when people will buy gold for gift-giving and jewelry purposes.

“Additionally, a lot of the gold is bought by farmers. They use gold as a savings account. If they have money, they convert it into gold. And when they need money, they sell some.”

Christian pointed out that the government has said it will periodically review its restrictions to decide whether they are too harsh and counterproductive.

“Those restrictions may be changed again next week, and they may be changed again and again and again over the course of the year,” Christian said. “So you have a market, in summary, where demand should be stronger in the last four months of the year. But whether or not it is will depend on what the government does with its intrusions into the gold market. It could negate any positive developments.”

By Allen Sykora of Kitco News asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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