Gold Market To Eye India In 2014 For Any Changes On Import Rules

By Allen Sykora of Kitco News
Friday December 6, 2013 11:30 AM

(Kitco News) - Gold traders will be watching closely in 2014 to see if India eases up on some of the restrictions on gold imports that crimped purchases just before the normally seasonally strong autumn demand period.

Some analysts are optimistic the country’s current-account deficit will narrow enough to let the government relax the rules, but others suspect they will stay in place for some time yet.

“The outlook for Indian gold imports is highly uncertain, given the government policy to discourage gold imports and possible changes in government policy,” said Jeff Nichols, managing director of consultancy American Precious Metals Advisors and senior economic consultant for Rosland Capital.

India historically has been the world’s largest gold-consuming nation, but could slip to No. 2 in 2013 due to the combination of strong Chinese demand and the import rules in India. Also, the current-account deficit helped push the rupee to record lows in 2013, which makes gold more expensive for Indians in their local currency.

Authorities raised duties on gold imports several times this year; they currently stand at 10%. Other measures were passed as well, including an 80-20 rule that stipulates that a minimum of 20% of all gold imported must be exported before further imports can be made.

Domestic gold premiums soared. Demand was still strong in the first half of the year, especially as the price of gold fell in dollar terms. But then Indian buying was “choked off” in the third quarter on the continued impact of the import rules combined with rupee weakness, said Rohit Savant, commodity analyst with CPM Group.

“It was in the third quarter that gold was badly hit, and it’s unfortunate because that is the time when demand typically picks up on a seasonal basis in India,” Savant said.

The combination of the 10% duties and lofty premiums due to a gold shortage in India combined to push the dollar-based price in the country 21% higher than the London fixing, said Sudheesh Nambiath, India-based precious metals analyst with Thomson Reuters GFMS. As of a late-November interview with Kitco News, he pointed out that gold in dollar terms for Indians was $280 an ounce higher than London, of which $154 was the premium and the remainder the duties. London gold was around $1,250 at the time.

For the year through the end of the third quarter, Thomson Reuters GFMS listed Indian gold imports of 638.2 metric tons. This was up from 604.4 in the first nine months of 2012. However, Indian imports were only 85.2 tons in the third quarter, less than a third of the average from the first two quarters of the year, Nambiath said.

 For October, normally a strong gold-buying month due to festivals and beginning of the wedding season, imports were only 23 tons, according to government estimates. Nambiath said not more than 50% of it would be for the domestic market, depending on how much stocks are de-bonded for domestic consumption. By contrast, imports were 84.5 tons in October 2012, he said.

Analysts List Mixed Expectations For 2014

The country’s current-account deficit hit an all-time high of $88.2 billion, or 4.8% of gross domestic product, for the fiscal year that ended in March. This led to the rules on gold imports as authorities sought to bring down the deficit to $60 billion. In mid-November, Reserve Bank of India Governor Raghuram Rajan said the deficit for the current fiscal year could fall to $56 billion, well below an earlier estimate of $70 billion.

“If they achieve the target of a $60 billion current account deficit...there should be some relaxation of gold import rules,” Nambiath said. This could occur by April or May, he continued, suggesting authorities could at least trim the gold duties, if not other measures such as the 80-20 rule.

Nambiath said a $70 billion deficit might be “more realistic.” And, he added, ”If that is the case, the possibility for any kind of relaxation of the policies toward gold could take a little longer, maybe July to August of next year.”

A key, he said, will be whether authorities cut the duties only, or whether they also relax measures such as the 80-20 rule. The latter has turned away many licensed agencies from importing gold. Nichols said the 80-20 rule probably discouraged imports even more than the higher taxes.

Analysts said there will be pent-up demand in India once the rules are loosened.

“So if there is a change in policy, it’s quite possible there will be a flood of buying at that point,” Nichols said.

However, Nambiath said he anticipates that even if the rules are relaxed, the government likely would impose a cap on the monthly volume of imports.

“I’m sure it will be a well researched approach on relaxation,” Nambiath said. “If not, then with any kind of relaxation...it could easily bring imports to about 150 to 170 (tons) in a month.”

That could renew the current-account deficit issue, he said, suggesting the government might try to keep gross imports to around 60 to 70 tons a month.

Marcus Grubb, managing director of investment for the World Gold Council, said it’s “hard to call” when the restrictions may be lifted. However, he said, “clearly the situation in India has improved” since earlier in the year.

“We do see these as temporary restrictions,” he said.

Savant, meanwhile, anticipates there will be little change in the Indian rules next year and that Indian buying will remain at roughly the same levels as in 2013.

“Next year, we are likely to see subdued demand in India for a variety of reasons,” Savant said. “One, it’s unlikely that the Indian government is going to scale back substantially the restrictions put into place. The main aim is to reduce the current-account deficit.”

However, he continued, traders and consumers will have had time to adjust to the restrictions, thereby avoiding the dramatic impact on imports that occurred in the third quarter.

CPM Group looks for neither a sharp rise nor decline in the amount of Indian buying during 2014. The price of gold itself may be lower, which would encourage buying, but the Indian restrictions will still be in place, he said.

Much of the country’s demand comes from farmers putting their income into gold, and this likely will continue, Savant said. However, those who buy gold for gift-giving special occasions may end up buying smaller quantities than in the past.

Nichols and Grubb said spring elections in India could have some impact.

“There might be some pre-election policy change because gold is important in the country culturally and historically,” Nichols said, adding that many Indians are unhappy with the rules, not just gold dealers. “They would like to buy gold and find they can’t...,” he added.

Grubb said pending elections could perhaps lead to a greater push on economic issues such as improving the current-account deficit and drawing back in foreign investment. Also, he said, there is potential for new policies and clarity from whomever wins the elections.

While it’s uncertain what India’s policies toward gold will be, Nichols pointed out that the country has “porous” borders and a certain amount of the yellow metal is likely to be smuggled into India. Gold is likely being smuggled from Nepal, Pakistan, across the Arabian Sea, and by travelers returning by air, often from Dubai, he said.

“The unofficial imports are likely growing rapidly, although I don’t think it will fully offset the decline in imports imposed by the higher taxes.”

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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