Duty hikes not enough, gold buyers to come back soon.

The government has finally acknowledged that increasing import duty is not going to reduce the appetite for gold in an otherwise poor economic scenario. Despite a record high current account deficit, finance minister has recently assured that there won’t be any more duty hike on gold imports.

Even after raising the duties twice from 1 per cent to 4 per cent in 2012, the imports during the first three quarters have already surpassed the government’s estimate for the full year of 2012-13 and the total import value of 2010-11.

A third row of duty hike in January too has not been much of a help; the March quarter imports are estimated to be higher than the same quarter last year. Despite curbs, World Gold Council (WGC ) expects that 2013 consumption can go up to 965 tonnes against 865 tonnes in 2012.

The prime minister’s economic advisory council (PMEAC) had projected gold imports for 2012-13 to be worth $36 billion. Despite subdued prices, the import value between April and December 2012 touched $37.8 billion.

Though the official consumption data for the January-March quarter is not out yet, the trading fraternity expects gold imports to be around 225 to 250 tonnes — 10 to 20 per cent higher than that in the same quarter last year. In 2012 March quarter, the country had imported 207 tonnes, as per the WGC.

“In the first week of January the government had indicated that there was a need to restrict gold imports. Fearing a possible duty hike, the traders stocked up the metal before the hike was announced on January 21. This would have probably led to an import of over 100 tonnes in January,’ said Bachhraj Bamalwa, chairman, All Indian Gems and Jewellery Trade Federation.

In the month of February, there were further apprehensions about another hike in the Union budget. This also led to considerable build-up of inventory. With the fear of duty hike having gone and the prices remaining subdued, imports did not come down drastically in March either, he said adding that in February and March the imports would have been around 150 tonnes.

“Last quarter consumption should definitely be higher than the same quarter in 2011-12. The imports of March quarter of 2011-12 were down by 29 per cent due to the month-long strike by jewellers. However, the value of imports should be lesser than the December quarter as the prices have moved down from $1,700 per ounce levels to $1,580 in the international market and from Rs 32,500 per 10 gm to Rs 29,500 in the Indian market,” he said.

“Small changes in import duty tend to be absorbed in consumer behaviour. We have to see whether this turns into something consumers are consciously factoring in,” said P R Somasundaram, managing director of World Gold Council, India, referring to the 12 per cent dip in demand in 2012.

“In a highly volatile commodity like gold 2 to 4 per cent of price rise due to duty hike will easily get absorbed,” said Prithviraj Kothari, managing director, Riddi Siddhi Bullions.

“Gold is an instrument of financial inclusion and in addition, the cultural affinity that Indian investors have with gold means that they will invest in gold as in the past to meet their emotional, cultural and financial needs,” said Somasundaram.

WGC anticipates that an economic recovery coupled with the rupee getting stronger against dollar may drive gold demand in this calendar year. “Our forecast range for gold imports in India for the full year 2013 stand between 865-965 tonnes,” he said. The gold consumption in the past three to four years has been almost stable and the slight decline in tonnage has been a result of the escalating prices.

“Consumption will naturally come down only when other asset classes start performing better. Meanwhile, to reduce the import bill we have suggested voluntary disclosure scheme or gold bond scheme.

The gold coming out of households by way of the scheme may be used to fund domestic jewellers and manufacturers for three to five years. This will reduce import and this lesser off-take by the largest consuming nation will also bring down the international gold prices,” said Bamalwa.

In the last budget, government has announced gold depository scheme and lending of gold by exchange-traded funds. Both the schemes are yet to take off.

“The possibility of allowing ETFs to leverage a percentage of their gold assets with other financial institutions should be evaluated carefully as there is a potential of exposing banks and gold ETFs to unnecessary risk. Gold deposit scheme is a step in the right direction to monetise gold widely held, but it is early to comment,’ said Somasundaram.


Soruce : mydigitalfc.com