Gold Prices Are Bargain for India's Consumers, But Problem for Government.

The last several months have been tough on gold prices, but gold bugs haven't lost their insatiable appetite for the yellow metal. With gold officially in a bear market, demand is surging at today's bargain prices.

Gold demand is especially strong in India, where gold is the investment of choice among consumers. India's gold imports reached 162 tons in May, almost twice the average level.

That's why last week the country - the world's biggest consumer of gold - increased the duty of gold imports for the second time in six months.

The duty was boosted from 6% to 8% on gold ore, and from 5% to 7% on intermediate products in attempts to decelerate the accelerating gold demand. Bullion prices fell 0.25% to $1,399.36 an ounce following the move.

Gold imports are one of the biggest contributors to India's mushrooming account deficit (which occurs when imports exceed exports). An increasing deficit affects the country's foreign exchange reserves and the value of its currency.

Friday, the rupee closed below the key 57 mark against the U.S. dollar for the first time in a year. The slide further casts a shadow on India's economy amid pricier imports and heightened inflationary risks.

Policy makers in India have been attempting to reduce its deficit and improve finances as it faces possible rating downgrades. They hope the duty increase will help.

What they expect is a steep decline in gold shipments over the next few months.

"In April and May we imported around 300 tons. In June and July imports would be around 90 tons," Prithviraj Kothari, director with RiddiSiddhi Bullions Ltd, a Mumbai gold-based wholesaler told BBC News.

Analysts said the increased import tax will fail to cool consumer demand, which means gold buyers will look elsewhere to get their hands on the yellow metal.

"From the last few months all the wrong decisions are being taken by the government to tackle gold imports," Mogit Kamboi, president of the Bombay Bullion Association told BBC. "This is not going to help reduce imports but smuggling will increase."

The country's jewelry industry has asked for an immediate rollback of the duty increase and meets with Finance Minister P. Chidambaram next week.

"We are with the government on the need to reduce the current account deficit, but not at the cost of damaging the industry," Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation told The Wall Street Journal. "There are better ways to curb gold demand than kill an entire industry."

Cheap Gold Prices Drive China Demand

Also weighing on gold prices last week was a report from China revealing gold imports from Hong Kong slumped in April from a record. The drop-off came as banks failed to get quotas fast enough to meet ballooning demand from mainland buyers eager to bulk up bullion purchases amid depressed prices.

After imports reached a record in March, quotas have been in short supply. Only qualified banks that secure quotas from China's central back are permitted to import gold to the mainland.

"Some qualified banks used up their gold import quotas in the first three months and weren't able to get the paperwork done fast enough to bring in bullion in April," Tian Rui, vice president of the precious metals division at INTL FCStone Trading Co. told Bloomberg. "We might see higher imports in May because demand surged after the rout."

In April, gold buyers in China paid four times the premium they paid a month earlier to take immediate delivery of gold. They paid up to appease consumers who swamped jewelry shops after gold prices slipped by the most in some 30 years.

China is the world's largest consumer behind India.

Back in the United States, Friday's mixed jobs report provided little guidance for the gold market. But, it bolstered equities, boosted the dollar and drew attention from gold.

The price of gold fell $32.80, or 2.3%, Friday to log a loss of 0.7% for the week. It was gold's first weekly loss in three. The yellow metal settled at $1,383 an ounce.

"I think for the short term the bottom in metals is in. We keep going back to that $1,400 area. To really flip this thing around in the short term we need a close over $1,423, but for the next week I think we'll at least go back to $1,400," Bob Haberkorn, senior commodities broker at RJO Futures told Kitco.

Source : moneymorning.com