Gold import curbs seen continuing in India to help currency

bullionwatchTNWhile the experts and jewellers of the gems and jewellery industry continue to support the relaxation of gold import curbs after new government comes into power. There are few others like Rajesh Khosla, Managing Director of MMTC – PAMP India Pvt. that say India will continue the restrictions on gold imports to control the current account deficit (CAD) and to defend the rupee.

Indian gold prices have peaked due to the unstable economic condition prevailing in India since last year. However, gold prices will take time to come down and volatility will be its hallmark, for some time. In a short-sighted response, the finance minister has advised us to refrain from buying the asset and increased the import duty to 10%.

Rising gold prices are a reflection of the fundamental weaknesses in our economy. If containing CAD is the aim, then the government can also ask the auto industry, for instance, to stop selling cars to save on fuel imports. But, government targeted the unorganized gems and jewellery sector to take care of CAD.

Co-relation between rupee and gold

However stopping consumption and restricting choice is not the appropriate way of doing the business and reviving the economy. Since, business of gold differs from standard ways. The value of gold is high because governments and US Federal Reserve consider it as some sort of backing for currency. However, the US dollar has lost most of its value against gold over past 50 years.

The value of dollar per se and the Indian rupee vis-à-vis the dollar determine gold prices. The relationship is inverse, with a weaker dollar raising prices and a weaker rupee against the dollar also increasing the price we have to pay. The relationship also works when reversed, in a much more complex manner. Gold is also defined as a hedge against inflation.

Till the US Fed continues to print money, the dollar will remain weak. As long as the dollar seems edgy, Asian Central Banks like China, India etc will shift from dollar-denominated securities to gold. It’s uncertainty that makes people buy gold.

Indian gold prices are expected to underperform in global markets with increase from current Rs. 2,900 per gram to around Rs. 5,000 per gram by Diwali 2016. Post the big movement, gold business will enter into bear market.

India might witness some gains, if international gold prices move up. On the contrary, if prices fall in international markets, prompting the dollar to move up, then significant correction is not reflected in our gold because of depreciation of rupee. Rupee fall and strengthening of crude prices globally, given the unrest in West Asia, will impinge on prices. Investment options like the Gold ETFs, gold accounts etc can be considered.

India continues to keep restrictions of imports

In India, gold contributed to almost 80% of a record $87.8 billion deficit in the year ended 31 March 2013. Being the second-largest gold consumer, India continues to keep restrictions on imports to control the CAD and defend the rupee, said the managing director of the country’s biggest refiner.

India represented about 25% of global demand in 2013, the World Gold Council says. Prime Minister Manmohan Singh requires importers to supply 20% of purchases to jewelers for export and sell 80% on the local market. Singh also raised import taxes and only allows banks and government- nominated entities to ship in gold. The new finance minister may review the rules after elections in progress now.

The limits would result in shipments of 650 metric tons to 700 tons in the 12 months started 1 April from 650 tons a year earlier, according to Rajesh Khosla at MMTC-PAMP India Pvt. Purchases were 845 tons in 2012-2013, the finance ministry says. While the form of restrictions may change, the government will continue to restrain buying, he said in an interview. Referring to the import regulations, he said, “I’m sure he will do something on 20:80. You may come up with a quota system, you may come up with an auction system, you may ask the banks to bid. Freeing the import of gold as it used to be prior to the 20:80, I don’t think that is going to happen.”

China overtook India as the biggest consumer last year. India buys almost all its gold from abroad. Unofficial imports almost doubled to 200 tons in 2013 while official flows dropped 4% to 825 tons, the London-based council estimates. Gold climbed 8.5% this year to $1,303.77 an ounce.

Gold prices to decline further

Gold prices are likely to decline 10% further amid expectations of further appreciation in the rupee against the dollar and favourable policies after a stable government is formed at the Centre in coming days.

“Currently, overall sentiment is bearish. However, pent up (heldover) demand is expected to emerge at lower level which will provide short term support to prices. The movement in the rupee will be a determining factor for gold price going forward,” said Sugandha Sachdeva, Associate Vice President, Religare Commodities.

In fact, gold price started moving down in the rupee term in India despite slight jump in the dollar term overseas. Gold fell by 1.65% in the last two weeks from the level of Rs 30300 per 10 grams on April 28 to trade currently at Rs 29800 per 10 grams in Mumbai’s popular Zaveri Bazaar. Analysts believe gold prices in the short term will fall to trade between Rs 27,000 – 27,500 per 10 grams. Interestingly, if the rupee strengthens further gold price will even fall below to hit Rs 26,000 per 10 grams.

All eyes on National Election

According to Raghuram Rajan, Governor of Reserve Bank of India (RBI), India have to go slowly and teadily in removing these curbs. It would be useful for some of the big uncertainties facing us to be behind us rather than still in front of us before major actions are taken. However, he is in favour of small small steps that can help the gold industry.

India levies a tax of 10% on gold imports after increasing the rate three times last year. Federal elections will be concluded on May 16 and opinion polls show the opposition Bharatiya Janata Party (BJP) will emerge as the largest party while falling short of a parliamentary majority. Not only the polls, but the entire gems and jewellery industry favours BJP.

Expectations that the new Government would reduce the rate of customs on gold imports from 10 per cent ad valorem are running high. There is also speculation that the extant strict import rules including export obligation would be eased. If these expectations are realised, there is belief that gold demand in the country would revive.

“The market now hopes for a stable government to come to power due to which the rupee is expected to appreciate which will cause gold prices to fall. If the rupee continues to appreciate due to the new government coming into power, gold prices will see a further drop,” said Naveen Mathur, Associate Director (Currencies and Commodities), Angel Broking.

Over and above this, there is an expectation of a fall in dollar-denominated gold prices in the overseas markets and even a firmer rupee. A combination of all these can potentially result in a sharp downward movement in the domestic price of gold, which currently is a tad below `30,000 for 10 gm.

It is in anticipation of such a scenario that many buyers have chosen to postpone their purchase decision. Anecdotal evidence suggests that jewellery demand is muted; an air of expectancy is developing about events that would unfold soon and lead to a price fall.

While the government may remove some of the curbs, they won’t do so completely because that would hurt the CAD, Victor Thianpiriya, a commodity strategist at Australia & New Zealand Banking Group Ltd., said.

Demand for Gold still high

Bullion contributed to almost 80% of a record $87.8 billion deficit in the year ended 31 March 2013. The shortfall in 2013-2014 would be contained below $40 billion, Finance Minister P.Chidambaram said on March 7, less than the $70 billion target. That helped the rupee rally about 14% from a record low in August. The nation needs other measures to reduce its demand for bullion imports, Khosla said.

Khosla said that throttling the supply of gold is not the answer. Government analysis showed India could set aside $30 billion annually to import gold and keep its current account manageable. With gold at $1,400 you come to around 650-700 tons. That’s the ballpark figure for you, whoever is in government.

With demand in India about 1,000 tons a year, the remaining 300 tons would be met through monetization of some of the 20,000 tons sitting above ground, Khosla said. Owners would deposit gold with banks for a set period for a fee and the banks would refine it before lending to jewelers, he said.

Doubling capacity

MMTC-PAMP’s plant located 35 kilometers (22 miles) from New Delhi airport has the capacity to produce 100 tons of gold and 600 tons of silver annually. It plans to double gold output to 90 tons by the end of this year from 45 tons in the year ended 31 March after the government allowed continuous imports of 15 tons of dore every two months. Dore, a raw material, may contain about 80% gold and 15% silver, he said.

The refinery, owned 72% by Switzerland’s MKS Holdings and 28% by MMTC Ltd, will double its gold capacity to 200 tons by November, Khosla said. The country should expand its refining industry and boost dore imports because processing creates value for India, he said. Use of scrap should also increase, he said.

Our raw material is mainly dore now, Khosla said. If you looked at the long term, the raw material for this plant let us say 10 years from now, I would say 50% is dore and 50% is scrap.

From a fundamental perspective, in the global market, while physical demand has stayed somewhat muted, investor flows have turned negative. Inflows into physically-backed gold ETPs seen in February and March were erased by outflows in April and early this month. To be sure, the outflows are not as hefty as seen this time last year but accretion is not in the positive territory. On the bourses, tactical speculators have built long positions as at May 6 as suggested by CFTC data. But given that prices have failed to rally in the last several days, the risk of less-committed longs exiting is real. The macroeconomic environment too is gold negative. Liquidity-driven price boom is coming to an end. The US Fed has begun to unwind its quantitative easing. Hopefully, in the coming months, when the tapering process is completed, depending on macro data, liquidity will shrink further and the dollar will be in demand.

These signals are ominous for gold. No wonder savvy buyers are waiting for an opportune time to enter the market. With prediction of below normal rains, the weather can play spoilsport as far as Indian physical demand is concerned. The positive relationship between good harvests and rising rural incomes on the one hand and robust gold demand on the other is well known.