The Ongoing Marriage Demand and Existing Global Trend Leads to Scarcity of Gold in the Market

Increased recycling of gold

Despite of high demand for gold, jewellers in India are running out of stock due to government’s import restrictions.

Dealing with Gold scarcity

Jewellers across India are in a quandary. Though the demand for gold is high in India, jewellers are running out of stock due to government’s import restrictions. Even as gold prices surged to $509 (Rs 31,720) per ten grams in Mumbai last month, jewellers across the nation are still struggling to meet the inventory demand. The ongoing marriage demand and a firm global trend have led to scarcity of gold in the market.

Suman Mehta, bullion retailer at Mumbai’s Zaveri bazaar, fears that the stocks would last only ‘till year end’. He says, “a major worry has been that debt has been rising because we now have to pay the cost of gold upfront, whereas earlier, gold was available on lease.” Manoj Kedia, another jeweller, is of the opinion that big jewellery houses have large inventory bank and won’t be impacted by the norms. Smaller jewellers are the one caught off-guard by RBI’s strictures.

Jewellers across the nation are facing severe inventory crunch due to hike in import duty. In September, the Indian government increased import duty on gold and silver jewellery to 15 per cent from 10 per cent, in a bid to protect the domestic industry. The government has hiked the import duty on gold thrice in 2013, as part of its measures to contain the widening current account deficit (CAD).

According to Haresh Soni, Chairman of the all India Gems and Jewellery Trade Federation, which groups more than 300,000 jewellers, the situation has further worsened because of government’s 80:20 norm. According to RBI, 80 per cent of gold import has to be for domestic use, while 20 per cent is to be used for exports. This has made it very difficult for domestic players to correlate with the international market, in addition to satisfying Indian demand, which is still very high. The federation has urged the centre to halve the import duty on gold from the current 15 percent to 5 per cent. At the same time, the international prices are hovering in the range of $1,900 to $1,300 and a correction is expected in the domestic prices, which is not yet reflected. Hence, there is a supply crunch and the premium has zoomed to $100 to $120 from $2, since there is less gold import, according to Bacchraj Bamalwa, proprietor of Nemichand Bamalwa and Sons, a bullion retailer in Kolkata. The 15 percent import duties and 10 percent premium have resulted in 25 percent price differential, which could not be borne by the trade.

 Poor demand during festivals

As the above conditions prevail, the gold and silver jewellery sales have failed to gain impetus this festive season due to high gold prices and pinching inflation. During Diwali and Dhanteras, sales were reportedly down 20 per cent in most areas and even 50 per cent down in other areas. According to Bamalwa, this was also due to wide fluctuation in the price of gold. This year, gold prices came down very sharply from $514 (Rs 32,000) per 10g to $433 (Rs 27,000) and then went up again to $530 (Rs 33,000). Jewellers saw maximum purchase in April-May when prices had dipped to Rs 26,000 as against Rs 33,000 during Diwali. Hence, people had also brought forward their wedding purchases when the prices were low.

In fact, during the festive season consumers restricted their purchases to pure symbolic ones. They preferred a purchase of mix-and-match jewellery with a lot of plain and light weight gold jewellery, given the high price. The number of gold coins sold during Dhanteras was comparatively low to that of last year. Anantha Padmanabhan, proprietor of NAC Jewellers in Chennai added, “There were several reasons for people not indulging in gold buying during the festive season. It was not related to just high gold prices. People also refrained from buying given the bad state of the economy and inflation. The premium on gold is killing indigenous trade.”

According to the World Gold Council report, gold demand during the last quarter of 2013 is likely to remain lower compared to the fourth quarter of 2012. The demand during Q4 of 2012, stood at 262 tonnes. The country’s Q3 2013, gold demand declined by 39 per cent to Rs 39,278.2 crore from Rs 64,200.9 crore in Q3 of 2012. The value of jewellery as well as the total investment demand declined up to 40 per cent in the third quarter.

“The global trend has reversed and the US economy has improved. We have seen one of the longest bull runs over last 10-12 years, and correction is bound to happen, but in India the situation is very serious,” added Bamalwa.

Rise in illicit gold

Dealing with India’s increased appetite for gold has resulted in a rise of illicit gold entering the country. The government’s attempts to restrict India’s current account deficit by placing restrictions on gold imports has created additional problems for authorities. not just hawala premiums for smuggling gold have doubled but even the number of gold seizures has almost doubled to 73 for the period of 2013-2014 from just 40 last year

Small local jewellers procure the illicit material at 7 per cent to 8 per cent lower rates and pass on the discount to their consumers. Big jewellers, who buy some of their jewellery from third party manufacturers, may be actually selling some of this gold at their stores, as they have no control over the gold procured by these third parties, explained Mehta. The import curbs have opened the backdoor channels to bring in the yellow metal. It has led to spurt in smuggling of gold into the country from neighboring states like Bangladesh, Myanmar and Sri Lanka.

According to WGC official,

“Imports has seen little bit of limitations. If this supply restrictions continue the demand in Q4, which will remain strong, will be met through the unofficial channel, which has grown significantly.”

In its fight against the widening CAD that crippled the rupee, the government has imposed unprecedented curbs on gold imports. Customs duty on the yellow metal has increased tenfold, while excise duty currently stands at 9 per cent. New rules such as strictly cash-only for imports, transaction taxes and even bans on gold-backed exchange traded fund investments have stymied India’s gold industry.

The sharply narrowing CAD for July-September has raised the eyebrows of the sleuths monitoring the activity closely. Directorate of Revenue intelligence (DRI) officials, estimate the smuggling at 500 kg a day with less than 1 per cent of the illegal consignment getting booked by law enforcers. Thus implying a monthly Rs 4,500 crore of illegal imports at current market prices or Rs 54,000 crore annually. Negating the Finance Minister P Chidambaram’s target of 20-25 tonne imports per month, almost 15 tonne of the demand shortfall is being met by smuggled gold. A senior economist adds, “The buck doesn’t stop at smuggling. Payments are also being made through under-invoicing of exports or over-invoicing of imports for smuggled gold.”

Officials estimate Jan-Oct 31, 2014 number of gold seizures at 579worth Rs153.20 crore as compared to 871 confiscated goods valued at Rs 99.08 crore in fiscal 2013. The two major causes leading to smuggling are the hike in import duty of gold in last 18 months, from zero to 10 per cent that reduced legal inflows of the yellow metal and the consumer demand that remains inelastic. Chidambaram’s target to bring CAD to $56 billion may quite be achievable under the present circumstances if backdoor operations of gold imports are ignored.

Theoretically, the approach is right but practically, he is breaking the backbone of the economy and creating jobs for smugglers,” said a senior official from the intelligence unit of the government.

CAD fell a whopping $16.6 billion or Rs 1,03,036 crore, at average dollar-rupee rate of Rs 62, to $5.2 billion, against the previous quarter’s (April-June) $21.8 billion. This was due to a massive drop in gold imports to the tune of $12.5 billion or Rs 77,587 crore from the previous quarter or $7.2 billion (Rs 44,690 crore) year-on-year due to high import levies. over 85 per cent of gold imports were in jewellery, unlike china where over 50 per cent are for industrial use, like IT chips, integrated circuits and transistors, to name a few. According to a senior banker, the demand for gold is always on the rise; every Indian invests in gold and even the poorest of the poor would gift gold as part of the tradition, be it the arrival of a new baby in the house, wedding or a success in job or education.

Increased recycling of gold

The wedding season is underway in India, and is expected to continue till January. With limited gold stocks available, jewellers are worried about meeting the demand. Finding an alternative to this issue, many people are having their old heirlooms melted down to be reused for marriages. Dotted with hundreds of jewellery shops, Mumbai’s Zaveri bazaar has many shops display placards saying “we buy old gold jewellery,” tempting buyers who face a $125 an ounce premium over London prices. Customers are getting in their bulky bangles and necklaces to be recycled for marriage purpose.

Many families believed that it was better to make use of old jewellery sets for the new bride. A 35-year-old Shazia Iqbal Ahmed, whose brother is getting married next month says, “We will end up saving 50,000 rupees ($800) on just the premium. It’s profitable for us at the end.” About 1 million couples are expected to marry in the current wedding season which has 71 auspicious wedding days and runs till May. Approximately more than 33,000 weddings took place last month. Gold is always in demand, as it is often gifted by the parents to the bride as an endowment. Generally, heavier items like bangles or necklaces weighing up to 50 grams or more are ordered by the parents of the bride. Relatives too prefer to gift pendant, rings or earrings weighing up to 5-10 grams.

A government clampdown on runaway gold imports that fuelled a blow-out in the CAD has led to new rules imposing higher duties, limiting imports and making it hard for jewellers to source supplies. However, jewellers believe that encouraging recycling of the gold will help mobilize an estimated 20,000 tonnes of gold stored in Indian households, 35 times the Reserve bank of India’s official reserves. Kumar Jain, a gold retailer in Zaveri bazaar says, “in this wedding season, since there is no gold available in the market, people have started coming with recycled gold. They have started exchanging the old gold for new and pay the labour charges.” He expects about 400 tonnes of recycled gold to enter the market this fiscal year to March 2014.

Soni says that the overall sentiment is weak; the import policy is not favourable which has resulted in high premiums. Hence, most consumers are looking to exchange old gold for new.

The gold investment demand dropped by 53 per cent at Rs 11,529 crore from Rs 24320.7 crore from the same period of last year. Total gold recycled in India in Q3 2013, shot up to 61.3 tonne from 34 tonne in Q3 2012. “The third quarter was an exceptional period where the recycled gold increased due to high price and various schemes that incentivised the consumers,” World Gold Council consumers,” World Gold council Managing Director (India), Managing Director (India),  Somasundaram P R pointed out.

“I think (gold) strictures will be there for at least the next six to twelve months,” said Nainalal Kidwai, president of the Federation of Indian chambers of commerce and industry. “Customers are not bothered about the economy and import restrictions. All they understand is the importance of the occasion and the importance of gold. This season due to a lack of inventory not many options are available. Seventy per cent of the total sales in the last month was through recycling of gold,” said Bhim Singh Taneja, manager at Jhaveri Jewellers, a small jewellery store in old Delhi’s Chawri Bazar.

The Indian government will welcome the increased recycling of gold as it tries to rein in the CAD to an acceptable range of 3.6 per cent to 3.8 percent of GDP, from 4.9 per cent in the June quarter, and is unlikely to reverse its recent measures any time soon.