Could India’s physical gold market, which remained at a near standstill on continued industrial action this week, be set to reopen? That is the understanding of at least some senior level sources this week in the country.
There was a growing belief — or perhaps hope — that the strike action could come to an end April 8 to mark the celebration of Ugadi or New Year for people in the Deccan region including the states of Karnataka, Maharashtra, Andhra Pradesh, Tamil Nadu and Telangana.
The Indian physical gold market is the world’s largest after China.
In a surprise move to an industry seeking tax relief and not burden, the government introduced a 1% jewelry excise tax in its February budget, which came in addition to a 10% import tax already levied.
Since then the industry has been at a standstill. “There’s no business,” said one broker in Mumbai. This was echoed across the country.
The excise duty is another step by the Indian government to flush “black money” out of the system. For now it is having the opposite effect, although most believe that longer term the move will be a success.
A discount of $35 has been heard — against the international dollar price — but that is said to be for smuggled gold and not official sales.
An “official” discount of $15 was suggested by many.
A senior trader said that in the long run the move will be good for the industry as it will increase regulation and put gold smuggling under pressure.
He said the larger jewelry companies will likely come round and spearhead reform in the market.
Sources, ranging from bankers to importers, are requesting that the government steps in to assist the local bullion market as it struggles with an ongoing jewelers strike on the back of a new 1% excise duty.
“Negotiations need to take place, we can see the argument from the governments point of view and the jewelers,” said one senior banking source.
Regulation, regulation, regulation
India’s gold jewelry market is largely unregulated and transacted in cash. Therefore there is no audit trail, something the government wishes to change.
“When more than 70% of trade is non-transparent and not regulated, the government wants to regulate it with some harsh steps,” a dealer said.
Gold represents about a quarter of India’s current account deficit, with annual consumption of around 800-900 mt met almost entirely by imports.
However, so far in 2016 imports have hit record lows on back of an elevated dollar price and low demand owing to the industrial action. Some are now forecasting imports as low as 400 mt in 2016.
“I think they’ll be at least 600 mt,” argued one senior source, although that figure is still a long way below historic data.
The government has attempted to limit the huge import demand through taxation and schemes promoting recycling of available stock in the country, as well as the purchase of paper gold over physical.
One mechanism, the ‘gold monetization scheme’ — a means of pulling local stock, held by individuals in the form of jewelry etc., into the official system — has so far not seen “one gram” enter its vaults, according to one source with direct knowledge of the situation.
Imports continue to decline
Imports of gold bars into India totaled 18.6 mt in March, down 22% on the previous month to the lowest monthly inflow on record, Indian customs data recently showed. The total is down from February’s previous record low of 23.8 mt.
One importer said that overall the government was doing the right thing, to stop illegal activity and smuggling of gold but that current legislation needs tweaking.
The big problem for the smaller jewelers is the fact that they don’t have the infrastructure to manage inventory and accounts, according to sources.
A large jeweler said that he is hoping for a compromise by the government, but is skeptical. He said that even if he wanted to open his showrooms the smaller union members would likely cause a headache and mess up the shops in a show of force.
Hope of return to trade
However, one refiner said that he is starting to see some signs of trading activity at a low level. “Hopefully the market should reopen next week,” he said.
He said that April 6 he sold 20 kg after 50 days of zero sales. There was talk that some banks had also started shifting limited stock that was imported earlier in the year at lower duty levels.
The Indian market is a complex beast, with bullion imports hit with a 10% customs duty and then every two weeks further tweaks to the domestic duty.
Once a fortnight a local duty is pegged either against the dollar/rupee exchange rate or the morning London Bullion Market Association Gold Price.
Therefore it is possible for those that have bought at lower levels to sell at a discount as the price rises.
The local price was quoted around 82,000 rupees/troy oz April 7; or roughly 28,500/10 grams, a standard measurement in India.
Buyers are said to be looking for a price of 26,000 rupees/10 grams to spur demand. In dollar terms traders suggested a price of $1,150-1,180/tr oz as a signal to buy.
The LBMA Gold Price settled April 6 afternoon at $1,221.40/tr oz.
“The current strikes are in one way good for the government, as it is limiting gold imports. However, it is also losing revenue as the market remains at deadlock. Something needs to budge,” said one importer.
The jewelry industry is India’s third largest employer after agriculture and textiles, and a similar three-week strike in 2012 forced the previous government to reverse plans for a 1% tax on non-branded gold.
The Platts India Gold Premium, a differential paid locally to the international price, was assessed at a discount of $35/oz April 6, unchanged on day.
Without Indian demand the international community is becoming increasingly doubtful that the recent solid rally in the gold price — with Q1 the best performance in almost 30 years — will continue much longer.
Luckily for Platts, with the industry on hold, there has been plenty of time for contacts to take time to showcase the country’s true gem: its cuisine.