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Updated: India Drops 80:20 Gold Import Restrictions

By Neils Christensen of Kitco News
Friday November 28, 2014 11:37 AM

Editor's Note: The article was updated to include comments from UBS.

(Kitco News) - In a surprise move, the Indian government has removed restrictions on gold imports and although generally positive for the gold market, it won’t significantly change the overall bearish tone, according to some analysts.

On Friday, the Indian government removed its current 80:20 import rule, which said that 20% of all imported gold had to be mandatorily exported before any new shipments could be brought in. Analysts have pointed out that the news is a surprise because recently there was speculation that the government would tighten import rules.

Although the 80:20 rule was curtained, the government did not mention whether it will reduce the 10% duty on all gold imports.

Analysts, though, are not expecting gold demand in India to drastically change because of the eased restriction as smuggling has increased significantly since 2013.

“On the margins it’s positive for gold but I don’t see it as a game changer,” said Bart Melek, head of commodity strategy at TD securities.

Melek added that “informal networks” filled the void created by the import controls. However, he admitted that now that those restrictions have been lifted, premiums should end up dropping, which could increase demand throughout the country.

Julian Jessop, chief global economist at Capital Economics, agreed that the government rules on gold imports weren’t very effective and although the news is bullish for the market, it will not drive prices significantly higher in the near-term.

Jessop added that Indian economic specialists are still going over the government’s statement regarding its decision to erase the 80:20 rule and said that it is not clear if it will be replaced with a different rule.

The news out of India will not have a dramatic impact on Capital Economics’ forecast for gold prices to hit $1,300 an ounce by the end of 2015 and $1,400 an ounce by 2016, he said.

Bernard Dahdah, precious metals specialist at Natixis, said that markets will have to wait until the government releases its import data to see the true impact on the gold market. He added it is still not clear just how much gold has been imported into the country and if that has been enough to meet consumer demand.

Edel Tully and Joni Teves, commodity analysts at UBS, said that the lack of reaction in the gold market is “somewhat baffling” as it is positive news for the yellow metal. However, she added that uncertainty about potential future rules could be impacting some enthusiasm.

“Indeed, the removal of the main constraint on the supply chain should be positive for gold as it frees up the inflow of metal into India, where appetite has remained quite healthy,” they said. “Perhaps the question that needs to be asked is: If the RBI is going to scrap the 80/20 rule, what are they going to replace it with?

Analysts noted that there is speculation that India ended the 80:20 rule because of the sharp drop in oil prices. The controls on gold imports were established in 2013 as the government tried to reduce its massive current account deficit. However, the biggest drag has been energy prices.

Crude oil has been in a significant decline since the end of September and has just recently fall to four and-a-half-year lows. As of 11:36 a.m. EST, January West Texas Intermediate crude oil was trading at $68.94 a barrel.

By Neils Christensen of Kitco News; nchristensen@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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