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Indian Gold Demand Jumps During Run-Up To Diwali Festival

By Allen Sykora Kitco News
Tuesday October 21, 2014 1:00 PM

(Kitco News) -Gold demand from India picked up significantly ahead of the approaching Diwali festival, analysts and traders reported.

Diwali, the festival of lights observed by the country’s Hindu population, falls on Thursday and is an auspicious time for buying gold. India, in turn, is one of the world’s two largest gold-buying nations.

“Demand in India has noticeably strengthened ahead of this year's Diwali, especially after gold prices traded around the year's lows during the month or so before this key festival,” said Joni Teves, analyst with UBS.

India-related activity was especially strong last week, although abating some since as prices recovered and the holiday approaches, meaning that much of the Diwali-related buying has already occurred, said Afshin Nabavi, head of trading with MKS (Switzerland) SA.

“A lot of the buying has already been done,” Nabavi said. “But the last two weeks were quite busy.”

Much re-stocking occurred in India during September, said Erica Rannestad, senior analyst for precious-metals demand with the GFMS team of Thomson Reuters. The government reported that in dollar terms, gold imports rose to $3.75 billion last month, which was the most since authorities imposed the so-called 80-20 rule in the summer of 2013. This rule, along with a 10% tariff on gold imports, was put in place last year in an attempt to curb gold imports to contain the current account and trade deficits. The 80-20 rule requires 20% of all imports to be re-exported as a finished product.

“One thing we are seeing is there is a lot of price sensitivity domestically,” Rannestad said. Indian demand got an extra boost when global gold prices fell during the seasonally strong period.

As of Tuesday, she said, gold was 27,545 Indian rupees for 10 grams. This was down from 28,085 as of Aug. 28. It was even lower on Oct. 6, when the U.S. dollar-based price of gold hit its low for the year. On that day, the rupee price of gold was 26,650 for 10 grams, Rannestad reported.

Teves said that based on UBS’ flows, Indian demand in September was the strongest for the year to date, with May coming in second. Further, she pointed out that trade data from Switzerland, through which much of the world’s gold flows, showed exports of 58.5 metric tons to India last month, the most so far in 2014 and nearly twice the average monthly volume.

While Diwali is this week, that doesn’t mean the Indian demand will completely dry up afterward, Nabavi said. The so-called wedding season continues for a few more months, he continued.

“Generally speaking, the (buying) season continues until around the end of January to mid-February,” Nabavi explained. “It really depends on the spot market.”

Further rises in prices could cool the buying, Nabavi said. “But if it remains around here, I expect the demand to continue to be relatively OK-ish.”

Some See 2014 Diwali-Related Demand Topping 2013

While observers offered mixed views on how 2014 Diwali-related Indian demand compares to seasonal periods in the past, most seemed to look for more buying this year than last.

Teves told Kitco News that it’s difficult to compare different years since the curbs on gold imports were imposed last year. While there are constraints on the supply side, it’s hard to quantify the “unofficial flows,” or smuggled gold, making its way into India.

“Spot prices are lower than last year. So we’ve seen more interest this year,” Nabavi said. “It’s been busier, I think, compared to last.”

Rannestad also reported that Indian buying appears to be stronger this year than last, but this was distorted by changes in premiums. The premium has been around $8.50, she said. By contrast, after the import rules implemented in 2013, the premium surged to around $130 as of the end of October 2013 and got as high as $160 last December.

“The huge premium that developed was because fabricators ran out of stocks (in 2013) and were having trouble getting more metal because of the 80-20 rule,” she said. “So there was a domestic shortfall in supply. Then you had the festival season in the fourth quarter of last year that created a ballooning in the domestic price premium.”

Rannestad’s firm is projecting gold-jewelry consumption of around 205 tons for the fourth quarter of this year, which she said would be up 36% year-on-year and a record for the October-December quarter.

“We do expect imports in October through December to moderate, because we think September is the month that re-stocking was occurring,” she said. “In terms of physical demand from the international market, we don’t anticipate higher levels of imports.”

However, domestic physical demand from households should remain strong, she continued.

As of August, Indian demand had been below past years, said Bernard Dahdah, precious-metals analyst with Natixis. Data compiled by Natixis showed 28.6 metric tons were imported during August, compared to an average of 82 tons a month in 2012 and 60 tons in 2013.

“We think the import tax in India is still weighing on demand for gold locally,” Dahdah said. “With upcoming Diwali, we will see an uptick in gold. But it won’t be as strong as in previous years…especially before the introduction of the import tax.”

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Indian Gold Import Curbs Expected To Continue

The pick-up in Indian demand for gold does mean one potential drawback for the metal – it may leave Indian authorities reluctant to roll back the import curbs on gold that were enacted last year to combat the trade and current account deficits.

“For the time being, they are going to stay,” Dahdah said. There had been expectations that the government of Prime Minister Narendra Modi, which came into power this spring, would loosen the curbs.

“That didn’t happen. It’s just for economic reasons, as demand for gold imports into India were weighing on the balance of payments,” Dahdah said.

As the country’s gold imports rose last month, India’s trade deficit widened to $14.3 billion, the most since May 2013. Indian authorities attributed much of the widening to the $3.75 billion in gold imports last month.

In fact, there were news reports Monday that the Finance Ministry was supposedly urging the country’s central bank to tighten restrictions on gold imports. However, this was rebuffed by the Reserve Bank of India.

“Given the government's vigilance in its efforts to contain the country's current account deficit, it is understandable that market participants easily become nervous of potential tightening of gold import regulations,” Teves said. “But there is limited visibility on how local gold market rules will evolve from here. While the government is very much focused on the current account deficit, there is also a deep understanding of gold's role in Indian culture and tradition. This suggests that any changes in regulations will be very calculated, and more data is likely going to be required before any decisions are made.”

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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