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Diwali demand boost bullion premiums

Gold premiums in India, the biggest user after China, has increased to $17-$18 an ounce between October 21-24, compared with $12 last week, on surging demand helped by the festival and wedding season in the country.

Gold sales in India during the festivals of Diwali and Dhanteras celebrated this week rose by about a fifth, a senior official at the country’s biggest gold trade group said on Friday to Mint. Gold premiums in India increased to $17-$18 an ounce in the festive week on account of the surging demand. A drop in prices during the holiday helped boost sales, while aggressive promotions by jewellery retailers also helped, dealers said.

The gold premiums in India were already hovering around the mark of $12-$15 an ounce from $ 7 in September-end. Analysts had expected the premiums to double by the end of October as the fourth consecutive quarterly decline in local prices spurs jewellery purchases before the nation’s main festival season.

Gold Premiums seen doubling on festival demand

The fees that jewellers pay banks and dealers is expected increase to $20 (R223) an ounce over the London cash price by the Diwali festival, a level last seen in early July, said Bachhraj Bamalwa, a director at the All India Gems and Jewellery Trade Federation. The trade body represents more than 300,000 jewellers. Dhanteras, associated with Lakshmi – the goddess of wealth, and Diwali, the festival of lights, are both considered auspicious to buy gold. “Diwali sales across the country were very good. It was about 20% higher compared with last year,” Bamalwa told Reuters.

Gold in Mumbai priced in rupees is heading for the longest run of quarterly losses since June 2004 as global prices drop on a strengthening dollar and prospects for higher US interest rates. Jewellery sales in India and China typically climb in the fourth quarter before the festivals and the wedding season. India placed restrictions on bullion imports last year to narrow a record current account deficit.

“Indian consumers had been resisting buying gold in the last few months because prices were higher and now they will buy for festivals and weddings,” Bamalwa said. “Consumers have realised that the government will not take any measures to ease import restrictions soon, so they will stop postponing purchases. Price is the most important factor.” The strong demand from India could support global gold prices. India set a record high import duty on gold last year to curb its trade deficit, and made it necessary for importers to re-export a fifth of all their purchases.

The moves contained imports into the country, with the resulting supply shortage sending local premiums to about $160 an ounce over the global benchmark at one point. Some of the rules were eased earlier this year, leading to higher imports and a fall in local prices. Low prices and a stable government at Centre triggered good sales in India, according to the jewellers in the industry.

 

WGC Outlook

Jewelry and investment demand in India dropped 34 percent to 394.4 metric tons in the first six months, according to the data from the London-based World Gold Council. Usage tumbled after the import curbs were introduced last year. Full-year demand may be between 850 tons and 950 tons, the WGC estimates.

Demand for gold in India remains relatively robust and is seen at 800 tons this year, Credit Suisse Group AG said on Sept. 23. China and India will continue to be strong sources of physical demand as consumers see value in prices toward the lower end of a range from $1,200 to $1,400 an ounce, it said.

“We expect premiums to rise but they will still be lower than last year and therefore won’t trouble consumers much,” said Bamalwa. The fees were about $120 an ounce last Diwali and peaked at $160 in December, he said.

Modi’s Agenda

Demand is seen rising as consumer confidence improves after the election of a new government, C.K. Venkataraman, chief executive officer of Titan Co. Ltd.’s jewelry business, said on Sept. 13. Prime Minister Narendra Modi prioritized the curbing of food costs, part of an agenda that also seeks to revive economic growth from near a decade low. The benchmark S&P BSE Sensex stock index increased 25 percent this year while the rupee rebounded about 13 percent from its record low in August.

Prospects for better demand spurred gains in shares of jewellery retailers in Mumbai. Titan, India’s largest branded-jewelry maker by market value, reached a record just before Diwali and is 70 percent higher this year. Tribhovandas Bhimji Zaveri Ltd. (TBZL) advanced 18 percent in 2014, while Rajesh Exports Ltd. (RJEX) jumped 85 percent. While jewelry buyers will relish the price decline, it may hurt the interest of investors during Diwali, as per the reports.

Indians buy bullion during festivals and for weddings as part of the bridal trousseau. The festivals begin in late August and peak with Diwali, and are followed by the wedding season. The strength of the monsoon, which helps to determine the nation’s agricultural output, can influence gold demand.

Monsoon Impact

“Monsoon has been good overall, so buying from villages will also improve,” said Kumar Jain, owner of U.T. Zaveri jewellery store in Mumbai’s Zaveri Bazaar to a newspaper. “At the same time, inflation has come down and people will have some money for discretionary spending.”

More than 75 percent of India got normal monsoon rain this year, the India Meteorological Department estimates. About 833 million people out of India’s 1.2 billion population depend on agriculture for their livelihood and the sector provides 14 percent of the nation’s gross domestic product. Wholesale inflation slowed to 3.74 percent in August, a five-year low.

Sales continue to remain strong post Diwali

Though the major gold buying festivals of the year are over, Bamalwa said sales could continue to be strong due to the wedding season that will extend until early next year. In anticipation of strong demand during the festivals, India had imported $3.75 billion worth of gold in September – a 450 % jump from the same period last year. The jump in imports weighed on the country’s trade deficit again, sparking fears that the government could tighten the screws again on overseas purchases of gold.

The jump in imports weighed on the country’s trade deficit again, sparking fears that the government could tighten the screws again on overseas purchases of gold. India’s finance minister was quoted in local media as saying that he could look at curbs on gold imports after the festive season. “Any further curbs could hurt imports and push up premiums,” Bamalwa said. In other parts of Asia, buying interest for gold was quiet, with premiums slipping in some regions, dealers said. “I think prices have to fall toward or below $1,200 before people come into the physical markets again,” said a trader in Hong Kong, where premiums slipped to $1.10-$1.20 an ounce from about $1.50 last week. In China, premiums fell to about $1.50 an ounce on Friday from $2-$3 an ounce.

The wedding season is contributing to the increasing demand for jewellery in the market. Gifts of gold are an important part of Indian weddings. Yash Zaveri, Director of Zaveri & Co. in an interview said, “Gold demand in the physical market has increased and is likely to remain firm until early next year because of festivals and the wedding season. Gold jewellery remains in demand during the marriage season as it is mandatory for Indian households to gift gold.”