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Analysts: Approaching Indian Festival May Help Put Floor Under Gold Market

By Allen Sykora Kitco News
Friday April 25, 2014 1:12 PM

(Kitco News) - Gold demand is picking up in India ahead of a key festival and should help curb any further weakness in international prices, said analysts with several consultancies.

Nevertheless, observers say the festival itself likely won’t be enough to spark a sharp rally considering the continuing restrictions on gold imports into India and recently lukewarm Chinese demand. However, analysts do look for an eventual relaxation of the onerous Indian import rules, which should then help consumption, although they do not see this occurring until sometime after spring elections.

The Akshaya Tritiya festival occurs in India on May 2. Additionally, May is considered one of the two “wedding seasons” in the country.

“That is typically a strong buying period in India,” said Rohit Savant, senior commodity analyst with CPM Group. This is significant for the market since India historically has been one of the world’s largest consumers and until last year was the No. 1 gold buyer in the world, before being overtaken by China.

“What we’re likely to see is limited downside while the buying is going on for that festival,” Savant said.

However, he and other said, the festival itself probably is not enough to send gold sharply higher either.

“In past years, it likely would have had a significant impact on the world price,” said Jeffrey Nichols, managing director of American Precious Metals Advisors. “But imports are significantly curtailed by the high taxes and the 80-20 rule, which still prevails.”
Authorities raised duties on gold imports several times last 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.

Like others, Nichols looks for eventual relaxation of what he termed “anti-gold” policies in India, which should then boost demand.

“But for the moment, it (consumption) is constrained by the import requirements and scant domestic supplies,” Nichols added. Imports of physical metal are “what really counts” for the international price of gold, and “that’s not likely to jump much in the next week or two,” he continued.

Gold premiums in India have been rising ahead of the festival, with a Reuters report putting this at around $110 an ounce, the highest level since February. They may go still higher over the next week, Nichols said.

This is largely the result of supply constraints specific to India, however, observers said. While there is a willingness by Indians to buy gold, this is not translating into a more substantial offtake from global supplies due to the Indian rules limiting gold imports. Still, some jewelers have reported that sales are currently up 9% to 13% from the fourth quarter, said Erica Rannestad, senior analyst for precious metals demand with Thomson Reuters GFMS.

“A little uptick in physical demand will help curb gold price declines for the next few weeks,” Rannestad said. “Usually you do get a little more buying activity (due to the Akshaya Tritiya festival). However, with the…restrictions, that does kind of complicate how Indian buying activity contributes to the international price of gold.”

Still, a certain amount of metal is reportedly making its way into the country anyway via smuggling, analysts said. “In fact, the smuggling trade is becoming more sophisticated every day the longer these trade rules are in place,” Rannestad said.

Further, Savant pointed out, some additional banks have been granted licenses to import gold, which should help limit the rise in premiums.

Meanwhile, Rannestad said, any pickup in Indian demand is being offset some by apparent “lackluster” Chinese consumption. Gold on the Shanghai Gold Exchange has traded at a slight discount to international prices for most of the last few weeks, which is unusual, she pointed out. Normally, she said, the SGE price is a “good proxy” for gauging the demand trend within China.

Analysts Anticipate Eventual Relaxation Of Indian Import Rules

Analysts say the gold market looks for some easing of the Indian import curbs to occur, although probably not until after elections that began last month and are scheduled to continue through May 12. The catch is that the restrictions presumably played some role in a narrowing of the current account deficit, thus meaning at least some caution by officials when relaxing the rules.

Savant said any relaxation of the rules may not come until the second half of 2014.

“I don’t think they would necessarily pull back all of the restrictions. They will probably keep some of them in place,” Savant said. Authorities may be most likely to change or do away with the rule that 20% of all imports must be re-exported, since that seems to be the one that has drawn the most criticism, he said.

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If the elections result in a clear majority for one party, the government may act more quickly on changing the import rules, Savant said. If there is no clear-cut majority, the process could be more time-consuming. He cautioned, however, that whereas this is one of the top issues for the gold market, it’s not necessarily the biggest and first issue for the new government, which is dealing with bigger economic problems.

Nichols looks for an eventual relaxation of the rules, noting that a number of politicians and even central bankers have made comments about easing them. When they do, there may be a “surge” in buying due to the “pent-up” interest that built while the rules were in place, he continued.

“Ultimately, India loves gold and that’s not changing,” Nichols said. “If not in the next few weeks, certainly in the next few months and certainly next few years, India is going to buy more gold and that will have an impact on the world price in the long term.”

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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