Outlook for gold prices in 2014
Analysts expect gold prices to drop further next year at the international level, but not to the same extent as seen in 2013
Gold was almost 30 per cent down in 2013 – ending decade-old rally prompted by rock bottom interest rates and measures taken by global central banks to prop-up the economy. However, a rally in equities and optimism about a global economic recovery dented the yellow metal’s safe-haven appeal. Silver, too, is down 36 per cent for the year – the worst annual performance since at least 1982, data suggests, according to a report published in Business Standard.
This is as compared to 8.5 per cent rise in the S&P BSE Sensex and 6.4 per cent rise in the CNX Nifty so far in 2013. At the global level, US stocks have seen a healthy upside with the S&P 500 index on course to mark its best year since 1997, reports suggest.
Worries this year that the US Federal Reserve (US Fed) will begin unwinding its stimulus and then the recent decision to do so has also hurt bullion that is seen as a hedge against inflation. In the Indian context, the government’s moves to reign in prices by imposing strict import conditions given the burgeoning current account deficit also impacted sentiment.
“Weak physical demand from the top consumer India due to high local prices and contracting investment interest in bullion has weighed down bullion prices in the international market,” said C P Krishnan, Director, Geojit Comtrade.
A key factor that would impact precious metals in India will be rupee’s movement against the US dollar. At the same time, commodities that are not internationally traded, domestic production and consumption would be the price determining factor, analysts say.
“After the elections, however, we believe the Indian currency can recover towards 63 by the summer, and 61 by year-end,” points out Kunal Kumar Kundu, Vice-president and India Economist, Societe Generale.
Analysts expect gold prices to drop further next year at the international level, but not to the same extent as seen in 2013. In the Indian context, the government is expected to continue to retain curbs on gold imports in order to manage the country’s CAD and the overall fiscal situation.
“In case of domestic gold, another factor that would have a bearing on prices is whether or not the government takes further measures to curb gold imports. If it does, the downside in MCX gold is likely to be limited,” said Shriram Pitre, Senior Vice-president and Head of Commodity and Currency research, Anand Rathi.
Shilpa Kumar, Senior General Manager and Head – Markets Group and Proprietary Trading Group at ICICI Bank say, “The sharp improvement in current account deficit this year from 4.9 per cent of GDP in FY2013 to an estimated 2.9 per cent is encouraging. In the short-term, it may be necessary to retain the curbs on gold imports till the recovery in exports sector is confirmed.”
Several brokerages such as Goldman Sachs, BNP Paribas and Societe General expect gold prices to drop below $1,050 in 2014. Physical demand, which had climbed to peak levels earlier this year as gold prices fell sharply, has now cooled – lessening its support for prices.
“Gold prices are likely to hover around $1,200 in 2014 in the absence of any major buying coming from China and India. Technically, the yellow metal has a supports at $1,180 and $1,150 levels. A breakout on the upside will only come if the prices breach the $1,262 mark. The overall trend remains bearish at least for the first half of 2014,” Krishnan of Geojit suggests.
Gold Jewellery Imports Surge to Over 20 Tonne at Fag-End of 2013
With import curbs on gold bars and coins creating shortages, gold jewellery imports have surged suddenly to over 20 tonnes in the October-December period of 2013, according to the Bombay Bullion Association (BBA).
India, the world’s largest gold consumer and that meets its entire demand through imports, did not buy any gold jewellery abroad in the same period last year. “For the first time, gold jewellery imports have picked up suddenly this year. Total imports are estimated to be more than 20 tonnes in October-December of 2013,” the Association’s past-President Suresh Hundia said.
This is despite gold jewellery attracting higher duty of 15 per cent as compared with 10 per cent on gold bullion. Hundia said jewellery makers are facing shortage as recent curbs have made bullion imports difficult. They have resorted to jewellery imports to meet domestic demand. Much of the gold jewellery is imported from the UAE. The imported gold jewellery is melted and re-designed as per the taste of Indian buyers.
To bring down current account deficit, government has taken several measures in the past few months to contain gold imports. Import duty on gold has been hiked to 10 per cent, while traders are mandated to re-export 20 per cent of each gold consignment before ordering fresh shipments. Going forward, Hundia said gold jewellery imports are expected to remain higher in the coming months as well.
Gold Jewellery Imports Decline 93 per cent in Eight Months
Gold jewellery import declined over 93 per cent in the first eight months of the current financial year following the government’s decision to curb import of the yellow metal to bring the current account deficit (CAD) under control.
Data compiled by the Gems &Jewellery Export Promotion Council (GJEPC) showed that gold jewellery import into India fell to a negligible level of Rs 1521.11 crore between April and November 2013 as compared to a staggering Rs 22,989.31 crore in the corresponding period last year.
There are two primary reasons for the steep decline in gold jewellery imports. The government clamped down jewellery traders who were taking benefit of the free trade agreement (FTA) signed between Thailand and India under which import duty on gold jewellery was reduced to one per cent as against 10 per cent otherwise. While under the FTA, the government made 20 per cent value addition mandatory in Thailand, traders believe that there was hardly room for such value addition in gold ornaments. Hence, all gold ornaments imported into India were originated either from China or some other major manufacturers that routed through Thailand.
“Maximum import of jewellery took place during the period when import duty was inverted with 1per cent duty on finished product mainly from Thailand, and 4 per cent on raw material. For survival of gold jewellery manufacturing industry, the duty differential should be a minimum 10 per cent as in the case of other countries including China,” said HareshSoni, Chairman, All India Gems and Jewellery Trade Federation (GJF).
The government of India banned import of gold jewellery from Thailand under the FTA setting thereby, an import duty equilibrium on ornaments. While the government of Thailand offered that it would pay gold import duty in India, importers remained hesitant on its practicality.
“Rising imports of finished products pushed domestic manufacturing industry into doldrums. Increasing import of gold jewellery from Thailand was the biggest threat for Indian artisans who were rendered jobless because of shrinking manufacturing activities in India,” said Pankaj Parekh, vice – chairman, GJEPC.
The government introduced 20:80 formula for gold import under which at least 20 per cent of imported quantity of gold should be supplied to jewellery exporters. Since, gold supplies to exporters did not offer 6-8 per cent of margins as done for supplies to domestic players, importers reduced gold import business. This resulted into huge shrink in gold supply to domestic players. As a consequence, gold is currently selling at 7-8 per cent premium in India over its imported price.
“The government raised import duty to 10 per cent in June – July this year from less than 1 per cent over 18 months ago. The government action helped control the current account deficit which hit the alarmingly high level of 5.5 per cent early this year now declined to 3.1 per cent,” said an industry veteran.
In order to curb gold jewellery import, the government raised import duty on ornaments to 15 per cent from the level of 10 per cent all across the yellow metal and its ornaments.
Considering 7-8 per cent premium and 10 per cent of import duty, gold is available currently at 17-18 per cent higher than its prevailing price in the global market. In comparison with that jewellery can be imported at straight premiums of 15 per cent. Therefore, import of gold jewellery still works out cheaper, said Parekh.
Soni believes that the immediate priority for the survival of the industry is to reduce import duty on raw material which will result into a reduction in smuggling and narrowing down premium on gold in India.
Jewellery Demand to Remain Steady in 2014
Jewellery industry had a roller-coaster ride in 2013 due to price fluctuation, import restrictions and official supply crunch. Smuggling of gold too, picked up big time in 2013. However, jewellery demand is expected to remain steady in 2014 despite of the economic and political changes anticipated in the election year.
The widening current account deficit made the government to curb gold imports in 2013. From four per cent in the beginning of the year, gold import duty was hiked to 10 per cent in a staggered manner. However, little did it impact demand as in April-May when the prices fell, the consumption surged. In the April-June quarter, gold demand rose by 71 per cent to 310 tonnes against the same period in 2012 and jewellery demand surged 51 per cent to 188 tonnes.
By August, RBI introduced the 20:80 formula, under which 20 per cent of every consignment should be for re-export. The confusion over the new rule remained till November as the official imports came to a halt and led to supply crunch in the market. The premium levied on gold by nominated agencies and banks shot up from less than $5 an ounce earlier to a high of $160 in 2013.
“From a policy point of view, it was a tough year for jewellery sector. The country went back to the ‘Gold Control Raj’ days. Increased smuggling has started pushing the industry into the hands of anti-social elements,” said Haresh Soni, chairman, All India Gems and Jewellery Trade Federation.
This also is taking the sector back to the unorganised players. “Taxes and duties have made gold jewellery business difficult in India. The jewellery sector is shifting back to unorganised sector and it is difficult for us to compete with them in the new environment. So we are now looking at newer markets like the Far East, where the jewellery consumption has been growing,” M P Ahmed, Chairman, Malabar Gold and Diamonds said.
According to Karan Vasa, Associate VP, Riddi Siddhi Bullions, the supply crunch also affected the jewellery-manufacturing sector, which has shed almost 25 per cent of its workforce. “The manufacturing sector is facing threat from the smuggled jewellery from overseas. Jewellery is available much cheaper abroad due to the high import duty and premium in India,” he said.
As per the World Gold Council data, the jewellery consumption in the Gulf region and south-east Asian countries surged in Q3 of the year, indicating smuggling to India.
WGC’s estimate of gold demand in the September quarter was 150 per cent higher than the gold import data released by the finance ministry, owing to increased recycled gold and part of the smuggled gold made available in the market. As per WGC till September, the country consumed 715 tonnes of gold and would touch 900 tonnes for the calendar year. Of this, jewellery consumption till September was up 13 per cent.
Industry believes that the consumption of jewellery will remain steady in 2014 as well. However, investment demand will depend upon several factors, including government policies and price fluctuations.
“The demand for jewellery will remain steady in the coming year. We have been requesting the government to bring down the import duty and relax the import norms. The industry will continue to restrain the sales of gold for investment purposes and this will keep imports between 725 to 775 tonnes for the entire year,” said Soni.